UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ___________

                                    FORM 10-K
              Annual Report Pursuant to Section 13 or 15(d) of the
                        Securities Exchange Act of 1934

                   For the Fiscal Year Ended December 31, 2002
                           Commission File No. 0-19301
                                   ___________

                     Communication Intelligence Corporation
             (Exact name of registrant as specified in its charter)

                  Delaware                                  94-2790442
       (State or other jurisdiction of                   (I.R.S. Employer
       incorporation or organization)                  Identification No.)


275 Shoreline Drive, Suite 500          (650) 802-7888
Redwood Shores, California         (Registrant's telephone             94065
(Address of principal executive   number, including area code)       (Zip Code)
offices)

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock, $.01 par value
                                (Title of Class)

     Indicate by check mark  whether the  registrant  (1) has  filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

Yes X   No

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  into Part III of this Form 10-K or any  amendment to
this Form 10-K.

     The  aggregate  market  value of the voting  stock  (Common  Stock) held by
non-affiliates  of  the  registrant  as of  March  27,  2003  was  approximately
$12,858,739  based on the closing sale price of $0.14 on such date,  as reported
by the Nasdaq Over the Counter Market.

               The number of shares of Common Stock outstanding as
                        of March 27, 2003 was 92,480,777.

    A list of Exhibits to this Annual Report on Form 10-K begins on page 27.


<PAGE>
                     COMMUNICATION INTELLIGENCE CORPORATION

                           ANNUAL REPORT ON FORM 10-K

                      FOR THE YEAR ENDED DECEMBER 31, 2002

                                TABLE OF CONTENTS


                                                                          Page

PART I................................................................      3
Item 1.  Business.....................................................      3
Item 2.  Properties...................................................     13
Item 3.  Legal Proceedings............................................     13
Item 4.  Submission of Matters to a Vote
         of Security Holders..........................................     14
PART II...............................................................     14
Item 5.  Market For Registrant's Common
         Equity and Related Stockholder Matters.......................     14
Item 6.  Selected Financial Data......................................     15
Item 7.  Management's Discussion and Analysis
         of Financial Condition and Results of Operations.............     16
Item 7A. Quantitative and Qualitative
         Disclosures About Market Risk................................     25
Item 8.  Financial Statements and Supplementary Data..................     26
Item 9.  Changes in and Disagreements with
         Accountants on Accounting and Financial Disclosure...........     26
PART III..............................................................     26
Item 10. Directors and Executive Officers of the Registrant...........     26
Item 11. Executive Compensation.......................................     26
Item 12. Security Ownership of Certain Beneficial
         Owners and Management........................................     26
Item 13. Certain Relationships and Related Transactions...............     26
Item 14. Controls and Procedures......................................     26
PART IV...............................................................     27
Item 15. Exhibits, Financial Statement Schedules,
         and Reports on Form 8-K......................................     27

CIC(R)   and  its  logo,   Handwriter(R),   Jot(R),   InkTools(R),   Sign-it(R),
WordComplete(R)  and  INKshrINK(R)  are  registered  trademarks  of the Company.
HRS(TM),  InkSnap(TM),  PenX(TM),  QuickNotes(TM),   RecoEcho(TM),  Sign-On(TM),
Speller(TM)  and  iSign(TM)  are  trademarks  of the Company.  Applications  for
registration of various trademarks are pending in the United States,  Europe and
Asia.  The  Company  intends  to  register  its  trademarks  generally  in those
jurisdictions where significant  marketing of its products will be undertaken in
the foreseeable future.

Certain  statements  contained  in this  Annual  Report on Form 10-K,  including
without limitation,  statements containing the words "believes",  "anticipates",
"hopes",  "intends",  "expects",  and other words of similar import,  constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks,  uncertainties and
other  factors  which  may  cause  actual  events  to  differ   materially  from
expectations.   Such  factors   include  the   following:   (1)   technological,
engineering,  quality control or other  circumstances which could delay the sale
or  shipment  of  products;  (2)  economic,  business,  market  and  competitive
conditions in the software  industry and  technological  innovations which could
affect the Company's  business;  (3) the Company's ability to protect its trade
secrets  or  other  proprietary  rights,  operate  without  infringing  upon the
proprietary   rights  of  others  or  prevent  others  from  infringing  on  the
proprietary  rights  of the  Company;  and (4)  general  economic  and  business
conditions and the availability of sufficient financing.


                                      -2-
<PAGE>

                                     PART I
Item 1.  Business

Unless  otherwise  stated all amounts in Parts I through Part IV are rendered in
thousands ("000s").

General

Communication  Intelligence  Corporation  (the "Company" or "CIC") is the global
leader in biometric signature  verification and natural input software solutions
and a leading  supplier of electronic  signature  software  focused on emerging,
large  potential  markets  such  as  document  automation,  corporate  security,
handheld  computers,   smartphones,   and  the  Palm  OS  aftermarket.   CIC  is
headquartered   in  Redwood   Shores,   California  and  has  a  joint  venture,
Communication  Intelligence  Computer  Corporation,  Ltd.  ("CICC"  or the Joint
"Venture"), in Nanjing, China. Industry leaders who have chosen to license CIC's
technologies include; Charles Schwab, Compaq, Fujitsu,  Handspring, IBM, Legend,
Oracle, Palm Source, Palm Solutions,  Prudential, Siebel Systems, Sony-Ericsson,
and The Tennessee Valley Authority.

Revenues for the year ended  December 31, 2002  decreased 44% to $3.3 million as
compared to $5.9 million for the prior year.  The  decrease in revenue  reflects
the  continuing  weak  economy  and  uncertainty  of  the  geopolitical  climate
throughout 2002 that continues to negatively impact corporate  confidence and IT
spending.

Segments

The Company's information is presented in two  segments-handwriting  recognition
software  and  systems  integration.  The  handwriting  recognition  segment  is
comprised of three revenue  categories:  OEM,  enterprise and online sales.  All
handwriting   recognition  software  is  developed  around  the  Company's  core
technology.  Systems  integration  represents the sale and installation of third
party computer  equipment and systems that use the Company's  software products.
All  systems  integration  revenue is  generated  through  the  Company's  Joint
Venture.

Core Technologies

The  Company's  core  technologies  are  classified  into two broad  categories:
"natural  input  technologies"  and  "transaction  and  communication   enabling
technologies." These technologies include multilingual  handwriting  recognition
systems  (Jot(R)  and  the  Handwriter(R)  Recognition  System,  referred  to as
HRS(TM)),  electronic signature,  handwritten biometric signature  verification,
cryptography,   electronic  ink  recording  tools   (InkTools(TM),   Sign-it(R),
iSign(TM), SignatureWallet(TM) and Sign-on(TM)), and operating system extensions
that  enable  pen  input  (PenX(TM)).  Other  consumer  and  original  equipment
manufacturer ("OEM") products include electronic notetaking (QuickNotes(TM), and
InkSnap(TM)) and software that can predict text input (WordComplete(R)).

The Company offers a wide range of multi-platform  software products that enable
or enhance pen-based computing.

Natural Input  Technologies.  CIC's natural input  technologies  are designed to
allow  users  to  interact  with a  computer  or  handheld  device  by  using an
electronic pen or "stylus" as the primary input device or in conjunction  with a
keyboard.   CIC's  natural  input  offerings  include  multilingual  handwriting
recognition systems,  software keyboards,  predictive text entry, and electronic
ink  capture  technologies.  Many  small  handheld  devices  such as  electronic
organizers,  pagers and smart cellular  phones do not have a keyboard.  For such
devices,  handwriting  recognition and software  keyboards offer the most viable
solutions for performing  text entry and editing.  CIC's  predictive  text entry
technology  simplifies  data entry even further by reducing the number of actual
letters  required  to  be  entered.   The  Company's  ink  capture  technologies
facilitate  the  capture of  electronic  ink for  notetaking,  drawings or short
handwritten messages.

Transaction and Communication Enabling  Technologies.  The Company's transaction
and communication enabling technologies are designed to provide a cost-effective
means for securing electronic transactions,  providing network and device access
control,  and enabling workflow automation of traditional paper form processing.
CIC believes that these technologies offer more efficient methods for conducting
electronic transactions while providing morefunctional user authentication and


                                   -3-
<PAGE>

heightened data security.  The Company's transaction and communication  enabling
technologies have been fundamental in its development of software for electronic
signatures,  handwritten biometric signature  verification,  data security,  and
data compression.

Handwriting recognition segment products

Key Handwriting recognition segment products include the following:

Handwriter, Chinese     Multi-lingual handwriting recognition software
Handwriter and Jot

Inktools                A suite of application development tools for electronic
                        signatures, biometric signature verification and
                        cryptography

iSign                   Web based development tools for electronic signature and
                        biometric signature verification

PenX                    Operating systems extensions for the Windows operating
                        system that enables pen-based functionality and
                        handwriting

QuickNotes and InkSnap  Electronic handwritten notetaking software

Sign-it and Sign-it     Electronic signatures for the enterprise market
Server

Sign-On and             Biometric Signature verification software for device
SignatureWallet         access and data protection

WordComplete            Predictive text entry software

Products and upgrades that were introduced and first shipped in 2002 include the
following:

iSign for Windows v2.1
InkTools for Windows v2.63
Jot for Palm OS v2.0
RecoEcho Plus v1.1
Sign-it for Acrobat v3.2
Sign-it for Word v4.03
Sign-it EX for Acrobat v1.23
Sign-it Tools v1.0
Sign-On Plus for Pocket PC v2.02
Sign-On for Tablet PC v1.0
Sign-it for AutoCAD v1.0
Signature Wallet for Palm OS v1.0
WordComplete v2.1
Chinese Sign-it for AutoCAD v1.0

Handwriting  recognition  software analyzes the individual strokes of characters
written with a pen/stylus and converts these stokes into  machine-readable  text
characters.  This software is especially useful for portable  electronic devices
that are too small to employ a keyboard, and for the input of ideographic script
characters  such as those used in written  Chinese  and  Japanese.  The  Company
currently  has two  recognition  system  offerings,  Handwriter  and Jot.  CIC's
Handwriter  Recognition  System  ("HRS(TM)")  recognizes  handwritten  input  on
Windows and Windows CE based pen computers and desktop PCs for either English or
simplified  and  traditional  Chinese  characters.   HRS  accurately  recognizes
handwritten  characters with no recognizer  training  required,  so the user can
write  naturally.  HRS is a  full-context  recognizer  that  offers  some unique

                                      -4-
<PAGE>

features such as automatic spacing between words and automatic capitalization of
the first  letter of new  sentences.  HRS is also an integral  component  of the
Company's  PenX  software  that is  currently  shipping  on many of the  leading
Windows based pen computers.  Key vertical market  licensees of HRS include such
companies as Fujitsu Limited, Intermec Corporation,  Xplore Technologies,  Inc.,
Mitsubishi Electric Corporation and Walkabout Computers, Inc.

Jot recognizes handwritten input and is specifically designed for small devices.
Unlike  many  recognizers  that  compete in the market for  handheld  data input
solutions,  Jot offers a patented  user  interface  that allows for the input of
natural upper and lowercase letters, standard punctuation and European languages
without  requiring  the user to memorize  unique  characters  or  symbols.  This
recognizer offers rapid and accurate  recognition without requiring the consumer
to spend time  training the system.  Jot has been  licensed to such key OEMs as:
Microsoft,  Sony Ericsson,  Symbian, Palm Solutions Group, Palm Source, National
Semiconductor  and  Vtech.  Jot  has  been  ported  to many  operating  systems,
including the Palm OS,  Windows,  Windows CE, VT-OS,  EPOC, QNX, Linux and OS/9,
and is currently  under  development  for others.  The standard  version of Jot,
which is  available  through  OEM,  Enterprise  and  Online  product  offerings,
recognizes and supports input of Roman-based Western European languages.

InkTools is an  electronic  signature  and  handwritten  signature  verification
software  developers'  kit that captures and analyzes the image,  speed,  stroke
sequence  and  acceleration  of a  person's  handwritten  electronic  signature.
InkTools  provides an effective and inexpensive  handwriting  security check for
immediate  authentication.  It  also  stores  certain  forensic  elements  of  a
signature for use resolving  whether a person actually  electronically  signed a
document.  The kit  also  includes  software  libraries  for  industry  standard
encryption  and hashing to protect  the  sensitive  nature of a user  signature.
Commercial  applications for this type of software  include  document  approval,
verification of the identity of users  participating in electronic  transactions
and  securing  log-in  access to computer  systems or protected  networks.  This
software  toolkit is used internally by CIC as the underlying  technology in its
Sign-On,  iSign,  SignatureWallet and Sign-it products as well as the integrated
solutions provided by the Systems  Integration  operation of the JV in China. It
has been licensed to numerous key development partners and end-users,  including
EDS, Bionetrix, Siebel Systems and Topaz Systems.

Sign-On and  SignatureWallet  are product  offerings  that utilize the Company's
handwritten  biometric signature  verification  technology to provide access and
data  security  on portable  devices.  This  provides  the  additional  level of
security  needed for devices  that are  increasingly  being used in business and
generally contain sensitive data.  Currently available for the Palm 3.x or later
and Windows CE 3.x operating systems,  the product is also being ported to other
platforms,  including Palm 5.x to meet the  specifications  of new licensees and
customers.

Sign-it is a family of electronic  signature  products for recording  electronic
signatures as they are being written as well as binding and verifying electronic
signatures  within standard  consumer  applications.  These products combine the
strengths of handwritten  signatures and  cryptography to process,  transact and
create  electronic  documents with the same legal standing as a traditional  wet
signature on paper in accordance  with the  Electronic  Signature in Natural and
Global Commerce act. Organizations wishing to process electronic forms requiring
varying  levels  of  security  can  reduce  the need for  paper  forms by adding
electronic signature technologies to their workflow solution. Currently, Sign-it
is available  for MS Word,  AutoCAD and Adobe(R)  Acrobat(R),  while support for
additional application environments are in development.

iSign provides  functionality  similar to InkTools but was specifically designed
for web based  architectures.  The  current  product  supports  either a Windows
implementation  with Internet  Information Server and Internet Explorer or Java.
The Java  implementation was designed to meet the needs of the higher-end server
products that support Java 2 and a broad base of client systems, which can range
from Windows devices to PDAs.

 Enterprise Revenues

With the recent  passage of legislation  making  electronic  signatures  legally
binding in virtually  every major  economy in the world,  the  transition  began
toward automating transactions in industries dependent on signatures in order to
complete  transactions.  CIC's handwritten  electronic  signature  solutions and
electronic  forms provide the basis for significant  expense  reduction  through
document  automation by eliminating  paper documents and related labor,  mailing

                                      -5-
<PAGE>

and storage  expense.  The  billions  of signed  original  documents  created in
today's  global economy  demand the utmost in user  identification  and document
integrity.  The inherent risks, logistical difficulties and staggering financial
costs associated with creating, processing, storing and retrieving paper records
are driving the demand for legally binding and secure electronic documents.

The Company's  Enterprise  related revenue decreased 14% over the prior year, to
$1.3 million from $1.7 million,  reflecting the  uncertainty of the economic and
geopolitical  climate throughout 2002 which did, and continues to, weigh heavily
on business  confidence  negatively  impacting IT  expenditures.  Even companies
fully committed to the benefits of the paperless environment  repeatedly delayed
eSignature program expenditures throughout 2002.

Enterprises that have license the Company's technology include the following:

Licensee      Product(s) licensed          Application of Products
------------- -------------------- -------------------------------------------
Accelio               Inktools     E-Signature for mobile forms

Agricultural
 Bank of China        InkTools     E-signature for document automation

Al-Faris              Multiple     Reseller and integrator in the Middle East
                                    focused on e-signatures
Allergan Sales        Sign-It      Clinical regulatory applications

Ameridial             Inktools     E-signature for internal use documents

Assurant Group        Sign-It      Sales force automation, new account openings

Audata, Limited       Multiple     Multiple applications focused on paperless
                                     environment and security
Baptist Health        Inktools     E-signature for patient records

BF Goodrich, Aircraft Sign-It      E-signature for internal use; Sensor Division
                                     documents

Canada Customs        Sign-It      E-signature for internal use documents

Charles Schwab        Sign-It      New account openings

China Ministry
  of Railways         InkTools     E-signature for document automation

Decade Software       PenX & InkTools      Windows pen computer upgrades

E-Com Asia Pacific
 Pty Ltd.             Multiple     Regional reseller, multiple applications

EDS                   InkTools     Information assurance for network and
                                    application security

Federal Reserve Bank  Sign-On      Biometric mobile device; access security

FMC Corp.             Sign-It      E-signature for internal use documents

First American Bank   Sign-It      E-signature for various financial and
                                     internal documents
First Command
 Financial            Sign-It      E-signature for document automation

IA Systems            InkTools     E-signature for loan organization

ILI Technologies      InkTools
                       & iSign     Various e-signature applications for the
                                     vertical markets in Israel
Industrial &
Commercial Bank
 of China             InkTools     E-signature for document automation

                                      -6-
<PAGE>


Licensee            Product(s) licensed     Application of Products
------------------- -------------------- ---------------------------------------
Integrate Online              InkTools    Mortgage closing

Nanjing Agricultural Bureau   InkTools    E-signature for document automation

National Healthcare           Sign-It     E-signature for document automation

Nationwide Building Society   InkTools    E-signature for document automation

Naval Surface Warfare         InkTools    E-signature for material center
                                            receipts
Novabase                      Sign-It     Systems integrator for various
                                           vertical market applications

Old Republic National         Sign-It     Title processing applications

Orange County, CA             Sign-It     Automate building permit process

PHT Corporation               Sign-It     Clinical trial documents

Physician WebLink             Sign-It     Automate patent enrollment / records
                                           / billing

Proware                       InkTools    E-signature for judicial orders

Prudential Insurance Co.      Sign-It EX  E-Signature for mobile forms

PSC Communications            Multiple    Reseller and OEM partner in the UK
                                           focused on e-signature

PureEdge                      Sign-It     E-signature for financial documents

RecordsCenter.com             InkTools    Legal contracts and other significant
                                           documents
St. Vincent's Hospital        Multiple    E-signature for document automation

Siebel                        Multiple    Sample delivery of regulated drugs

Siemens Medical Solutions     Multiple    E-signature for healthcare

Symbol Technologies           Multiple    Reseller for all major products

Tennessee Valley Authority    Multiple    E-signature for approval of internal
                                           documents

Turner Construction/Oracle    iSign       E-signature for document automation

Wisconsin Electric Power      Sign-On     Biometric mobile device; access
                                           company security

Recent industry surveys indicate that IT spending will increase in 2003, despite
economic  uncertainties and cost reduction pressures,  because companies believe
the benefits far outweigh the expenditure (UBS Warburg,  Celent). The Company is
optimistic  that  CIC's  installed  base of pilot  programs,  which are  nearing
rollout, some of which are included above, will provide the basis for increasing
revenue growth in both the near term and beyond.

OEM Revenues

OEM  revenue  for 2002  declined  68% versus the prior  year,  to $360 from $1.1
million,  reflecting both declining  shipments of handheld  computers in general
and  significant  cutbacks in planned  shipments of specific CIC OEM  customers.
Handheld computer shipments for 2002 were 9% below the prior year (Dataquest).

Despite that harsh  reality,  OEM sales efforts in 2002 resulted in CIC emerging

                                      -7-
<PAGE>

as the leading  supplier of natural input  software going into 2003. In November
of last year, Palm Source  replaced  Graffiti with CIC's Jot as the standard and
only  handwriting  software on all Palm OS based  devices.  Palm based  handheld
computers and smartphones remain the global leader with approximately 56% of the
worldwide  device  market.  PalmSource  shipments are forecasted by IDC to reach
some 12 million  annually by 2005 with a projected  installed base of 55 million
worldwide.   Palm  OS  based  devices   manufactures   include  Palm  Solutions,
Handspring,  IBM,  Kyocera,  Samsung,  Sony and Symbol.  In addition,  CIC's Jot
product was chosen as the natural input software for Sony Ericsson's new Symbian
OS based P800 multi  media  smartphone.  Sony  Ericsson,  together  with  Nokia,
Motorola,  Siemens and Psion form the Symbian  Alliance.  The  objective  of the
Symbian  Alliance is to  establish  the Symbian OS as the  standard for wireless
devices.  CIC has a license  agreement with Symbian making the Company's Jot and
other software products available for evaluation to Symbian OEM members.

IDC projects the total handheld computer and smartphone market will grow to over
26  million  shipments  by 2005.  With CIC's Jot  embedded  on all Palm OS based
devices  and on both  Ericsson  R380 and Sony  Ericsson  P800  smartphones,  the
Company  believes  it is well  positioned  to  sustain  its  current  leadership
position and benefit from the continuous and increasing flow of royalty revenue.

Key OEM Licensees include:

 Licensee                Product(s) licensed         Application of Products
-------------- ---------------------------------- ------------------------------
 AirSpeak                  Jot                         Handheld PC Pro

 Sony Ericsson             Jot, QuickNotes, Sign-On &  Smart cellular phone
                            WordComplete

 Fujitsu                   HRS, PenX, Sign-On Plus &   Windows and Windows CE
                            InkTools                    pen computers

 GSC Mobile Solutions      Inktools                    Windows pen computers

 Handspring, Inc.          Reco Echo                   Electronic organizer

 HP                        Jot                         Linux based PDA

 IA Systems                Jot                         Wireless Internet access
                                                        device

 IBM                       Sign-It                     Windows pen notebook

 Inteliworxx               HRS & PenX                  Windows pen computers

 Interlink                 Sign-It                     E-signature retail bundle

 Intermec/Norand           HRS & PenX                  Windows pen computers

 Mathsoft                  Math Recognizer             Handwriting recognition
                                                        for mathematicalnotation

 Misys Healthcare          InkTools                    Handwriting recognition
                                                        and security

 Motion Computing          SignOn                      E-signature products

 National Semiconductor    Jot                         Wireless Internet access
                                                        device

 Pacific Star              PenX                        Windows pen computers

 Palm Solutions Group      Jot                         Electronic organizer

 PalmSource                Jot                         Electronic organizer

 Telos Corp.               PenX                        Windows pen computers

                                      -8-
<PAGE>



 Licensee                Product(s) licensed          Application of Products
---------------- ---------------------------------- ----------------------------
 Topaz                     InkTools                    E-signature bundle

 Vtech                     Jot                         Electronic organizer

 Wacom                     Chinese Handwriter          Digitizer tablet and
                            & Sign-It                   e-signature

 Walkabout                 HRS & PenX                  Windows pen computers

 Xplore                    HRS & PenX                  Ruggedized mobile
                                                       computers

 Xybernaut                 HRS, PenX & Jot             Wearable computers

Online/Retail Revenues

Online revenues have been generated  primarily  through direct mail sent to Palm
handheld  computer  (PDAs) owners  utilizing  names and addresses  acquired from
Palm.  Retails sales are generated  through an agreement with Elibrium Inc. that
positions CIC's Palm OS based software  offerings  directly at the point of sale
at retailers including Comp USA, Staples, and Office Max.

Revenues  from the  Company's  software  sold  directly  through  it's  website,
(www.cic.com)  and at the retail point of sale  totaled $351 in 2002,  62% below
the $913 for the prior year,  reflecting  both the decline in handheld  computer
shipments in 2002 (9% below 2001;  Datquest) as well as the overall  decrease in
consumer  spending both online and at retail due to the continuing  weak economy
over the past two years.

Recent events, however, have provided the basis for what the Company believes is
significant  aftermarket revenue potential both near and longer term. PalmSource
recently replaced Graffiti with Jot as the standard and only text entry software
for their Palm  operating  system (OS).  Palm OS based  handheld  computers  and
smartphones  are the  global  leader  with about 56% of the  worldwide  wireless
device  market.  Palm OS based  devices  represent an installed  base of over 25
million devices that IDC projects will grow to over 55 million by 2005.

CIC recently  launched a marketing  program  targeted at the 25 million existing
Palm OS based device owners to easily  upgrade their text entry from Graffiti to
CIC's  Jot and gain the  benefits  of the  advanced  text  entry  software  that
PalmSource  chose  to  replace  Graffiti  on all new  shipments.  The  marketing
programs  leverage  the  marketing  efforts of device  manufactures  and channel
partners  including Palm Solutions  Group-the  leading provider of Palm handheld
computers,  Handspring,  Handango- the leading online Palm software supplier and
Elibrium-a leading retail software publisher/supplier.

China Revenues

CIC China ("CICC"), 90% owned by CIC, was established over nine years ago and is
headquartered in Nanjing China. The Joint Venture is 10% owned by Jiangsu Hongtu
Electronics Group, the leading DVD supplier in the US with its APEX brand, and a
leading supplier of other high technology products and systems.

Revenue  from CICC was $1.3  million  in 2002,  a  decline  of 24% over the $1.7
million in the prior year. This decrease  reflects  primarily the need to expand
sales  coverage  from a  traditional  focus on the  local  Nanjing  and  Jiangsu
Province market. Despite the economic slowdown in the US and western markets and
the negative impact on corporate IT spending, China is enjoying a robust economy
and its IT expenditures  are increasing three to four times faster than the rest
of the  world.  China  is the  world's  third  largest  economy  and its  recent
accession into the World Trade  Organization is fueling its economic growth,  in
this vast nation of 1.3 billion people, as it prepares to compete on a worldwide
basis.  The benefits of CIC's electronic  signature  technology for applications
including eCommerce,  automation of signature dependent electronic forms for the
paperless  environment and corporate  security are impacting the demand in China
more intensely than in the US and European markets.

                                      -9-
<PAGE>

Recently, the Company implemented an overall strategy aimed at accelerating CICC
sales growth by focusing  sales  resources on expanding  the rollout and further
deployments  of CICC's  installed  base of showcase  enterprise  and  government
installations while rapidly  implementing a channel strategy that leverages this
installed base of reference  accounts to attract major channel  partners who can
rapidly   establish   China-wide  market  coverage  and  penetration  for  CIC's
technology.

The  Company  believes  that  CICC is well  positioned  to  participate  in this
explosive growth. CICC's installed base of both Chinese corporate and government
deployments   include   the   Agricultural   Bank  of  China,   Hu  Nan   Mobile
Communications,  International  Construction  Bank  of  China  (China's  largest
commercial  bank),  Ministry  of  Agriculture,  Nanjing  Civic  Bureau,  Nanjing
Municipal Government, Panda, and the Ministry of Railways.

Over the past two years,  CICC has  emerged as the  leading  supplier in Jiangsu
Province of a fast growing mobile industry  application for regulated goods with
an estimated 70% market  share.  This turn-key  offering  provides  hardware and
software  systems for the receipt and delivery of taxed,  measured and monitored
goods using handheld  devices  including  Symbol,  Handspring  and Palm.  CICC's
offering  includes the  integration  of  enterprise  software  solutions for the
server side / backend  management of these mobile systems and captured data. The
systems integration business affords CICC the opportunity to include the sale of
its core software by integrating  electronic  signature and Chinese  handwriting
recognition into its turn-key solutions.

The Company  believes that the emerging  market for electronic  signature  based
applications  and handheld  receipt/delivery  based systems,  acceptance of CICC
products by leading Chinese enterprises and government agencies,  the legitimacy
and credibility  afforded CICC by joint venture status and the explosive  growth
potential of the China market,  now driven by accession to the WTO, provide CICC
significant growth potential in 2003 and beyond.

Marketing

Handwriting Recognition Segment

The Company's  products are marketed through three sales approaches:  OEM sales,
enterprise  and  online/retail  sales.  OEM sales  efforts  are aimed at license
revenues derived primarily from smart handheld device manufacturers.  Enterprise
sales   efforts  are  directed  at  both  software   providers  and   end-users.
Online/retail  sales represent  revenues  generated from the Company's  software
sold through its website and retail outlets.

OEM Licensed  Products.  The Company  currently  licenses  software products for
Windows(r)3.x,  Windows(R)'95,  Windows'98,  WindowsNT,  WindowsCE,  EPOC,  QNX,
VT-OS, Palm and Linux. The Company also ports its products to other platforms to
meet  the  specifications  of  licensees.   The  Company's  PenX,  Sign-it,  and
Handwriter  Recognition  System are  licensed for  portable  PCs  utilizing  the
Windows(R)'95, Windows(R)'98, Windows(R) NT, and WindowsCE operating systems and
are primarily  used for field force  automation  and in pen-input PC peripherals
for desktop  use.  Jot,  QuickNotes,  Sign-On,  WordComplete  and the  Company's
software  keyboard  are  licensed  primarily  for the new,  smaller  classes  of
personal computers that utilize the Windows(R) CE operating systems and handheld
communicators  such  as  smartphones  and  PDAs  that  use the  Palm or  Symbian
operating system.

Enterprise  Solution  Products.  The Company offers several products targeted at
the broad enterprise market. The Company believes that this market could benefit
from workflow  automation  solutions using electronic  signatures or handwriting
authentication such as new account openings,  regulated document submissions and
device/network security. For these markets, the Company offers several products,
including InkTools, a high performance software developer's kit for implementing
systems using electronic ink and electronic  signatures,  which is available for
almost all major operating systems; iSign, which provides the same functionality
as  InkTools  but  is   specifically   designed  for   distributed   application
architectures;  and  Sign-it,  which is designed to provide  this  functionality
within  the  framework  of the most  common  word  processing  applications  and
electronic form publishing environments.

Online Product Offerings.  The Company's Online Sales department is charged with
the sale of its shrink-wrapped  software  applications and tools. This currently

                                      -10-
<PAGE>

includes most of the Company's  products and everyone from consumers to software
developers  and  corporations  are  customers.  These  products are sold through
retail  outlets and over the Internet on the  Company's own website and by other
Internet-based  electronic  resellers.  Consumer  versions of these products are
being sold for users of the Palm connected organizers and Windows(R) CE devices.
Much of the growth in Online sales since 1998 was attributable to sales of these
products to users of Palm OS devices.

Systems Integration Segment

The  Company's  systems  integration  activity  is  confined  to CIC China where
services  are provided to Chinese  enterprises  and  government  users and other
joint ventures in the Peoples Republic of China involving the re-sale of desktop
computers,  monitors,  servers and other computer related products together with
customized  software in mostly office  automation  and  materials  replenishment
planning applications. See China Revenue segment.

Copyrights, Patents and Trademarks

Handwriting Recognition Segment

The Company relies on a combination of patents,  copyrights,  trademarks,  trade
secrecy  and  contractual  provisions  to protect  its  software  offerings  and
technologies.   The  Company  has  a  policy  of  requiring  its  employees  and
contractors to respect proprietary  information through written agreements.  The
Company also has a policy of requiring  prospective  business  partners to enter
into  non-disclosure  agreements  before  disclosure  of any of its  proprietary
information.

Over the years,  the Company has  developed and patented  major  elements of its
software  offerings and technologies.  In addition,  in October 2000 the Company
acquired from PenOp,  Inc., and its subsidiary,  a significant  patent portfolio
relevant to the markets in which the Company sells its  products.  The Company's
material patents and the years in which they each expire are as follows:

                 Patent No.            Expiration
             -----------------     -------------------
             -----------------     -------------------

                 5544255                 2013
                 5647017                 2014
                 5818955                 2015
                 6064751                 2017
                 6091835                 2017

The Company  believes that these patents provide a competitive  advantage in the
electronic  signature and handwriting  recognition markets. The Company believes
the  technology  covered  by the  patents  is unique  and  allows us to  produce
superior  products.  The Company also  believes  these patents are very broad in
their coverage.  The technology goes beyond the simple handwritten signature and
includes measuring electronically the manner in which the person signs to ensure
tamper  resistance and security of the resultant  documents and the use of other
systems for  identifying  an individual  and using that  information  to close a
transaction.  The Company  believes that the patents are  sufficiently  broad in
coverage that any product with substantially similar functionality will infringe
its patents. Moreover, because these patents do not expire for between 10 and 14
years from the date hereof,  the Company believes that it has sufficient time to
develop new related technology, which may be patentable, and to establish CIC as
market leader in these product areas. Accordingly, the Company believes that for
a significant period of time the patents will deter competitors from introducing
competing  products  without  creating  substantially  different  technology  or
licensing its technology.

The Company has an extensive list of registered and unregistered  trademarks and
applications  in the United States and other  countries.  The Company intends to
register its  trademarks  generally  in those  jurisdictions  where  significant
marketing of its products will be undertaken in the foreseeable future.

                                      -11-
<PAGE>

Systems Integration Segment

Systems  integration  does  not rely to any  material  degree  on the  Company's
products  and,  therefore,  its patents  and their  ultimate  expiration  do not
significantly impact the systems integration segment.

Material Customers

Handwriting Recognition Segment

Historically,  the Company's handwriting  recognition segment revenues have been
derived from a limited number of customers.  One customer,  Nationwide  Building
Society, accounted for 11% of total segment revenues for the year ended December
31, 2002. One customer,  The Prudential  Insurance  Company of America accounted
for 16% of  total  segment  revenues  for the year  ended  2001.  One  customer,
Ericsson Mobile  Communications  AB, accounted for 16% of total segment revenues
for the year ended 2000.

Systems Integration Segment

One customer, Fujitsu Ltd. accounted for 30% of total system integration revenue
for the year ended  December 31, 2002.  This same customer  accounted for 16% of
total  segment  revenues in the twelve months ended  December 31,  2001and 2000,
respectively.

Seasonality of Business

The  Company  believes  that  neither of its  segments  is  subject to  seasonal
fluctuations.

Backlog

Handwriting Recognition Segment

At December 31, 2002, backlog approximated $165,  representing advanced payments
on service maintenance  agreements and non-recurring  engineering  projects that
are expected to be recognized over the next twelve months. At December 31, 2001,
backlog approximated $88,  representing advanced payments on service maintenance
agreements  and  non-recurring  engineering  projects  that are  expected  to be
recognized  over  the  next  twelve  months.  At  December  31,  2000,   backlog
approximated  $61,   representing   advanced  royalty  and  service  maintenance
agreements.

Systems Integration Segment

At  December  31, 2002  backlog was  approximately  $34. At December  31,  2001,
backlog was approximately $178. There was no significant backlog at December 31,
2000.

Competition

Handwriting Recognition Segment

The Company faces competition at different levels.  Certain  competitors,  e.g.,
PenPower  Group,  and Palm  Inc.,  have  developed  or are  developing  software
offerings,  which may compete directly with the Company's offerings. Most of the
Company's direct competitors,  e.g., Microsoft Corporation,  Silanis Technology,
Inc.,  and  Advanced  Recognition  Technology,  Inc.,  have  focused on only one
element of such offerings, such as handwriting recognition technology, signature
capture/verification  or pen-based  operating  environments  or other  pen-based
applications.  The Company believes that it has a competitive  advantage in some
cases due to its range of product offerings. There can be no assurance, however,
that competitors, including some with greater financial or other resources, will
not succeed in  developing  products or  technologies  that are more  effective,
easier to use or less expensive than the Company's products or technologies that
would render its products or technologies obsolete or non-competitive.

                                      -12-
<PAGE>

Systems Integration Segment

The Company's Joint Venture  competes with other systems  integrators of similar
size  (less  than 100  employees)  in China  for  small to  mid-size  enterprise
opportunities.  The Company primarily  competes on price and quality and breadth
of services for these opportunities. The Company believes that it is competitive
in its pricing and has been  consistently  recognized  by its  customers for its
high quality of service.

Employees

As of December  31,  2002,  the Company  employed an  aggregate  of 55 full-time
employees.  The  Company's  handwriting  recognition  segment  consisted  of  40
employees,  20 of which are in the  United  States and 20 of which are in China.
The Company employed 15 full-time  employees in its systems  integration segment
in China. From time to time, the Company also utilizes  additional  personnel on
an as  needed  basis.  The  Company  believes  it has  good  relations  with its
employees.  None  of  the  Company's  employees  are  a  party  to a  collective
bargaining agreement.

Geographic Areas

For the years ended December 31, 2002,  2001,  and 2000, the Company's  sales in
China as a percentage  of total sales were 38%, 29% and 26%,  respectively.  For
the year ended  December 31, 2002 and the years ended  December 31, 2001,  2000,
the  Company's  sales in the United  States as a percentage  of total sales were
62%, 71% and 74%, respectively. Included in the U.S. sales are export sales. For
the years ended December 31, 2002, 2001, and 2000, the Company's export sales as
a  percentage  of  total  revenues  were   approximately   12%,  16%,  and  36%,
respectively.

Forward Looking Statements

Certain  statements  contained  in this  Annual  Report on Form 10-K,  including
without limitation,  statements containing the words "believes",  "anticipates",
"hopes",  "intends",  "expects",  and other words of similar import,  constitute
"forward looking" statements within the meaning of the Private Litigation Reform
Act of 1995. Such statements involve known and unknown risks,  uncertainties and
other  factors  that  may  cause  actual  events  to  differ   materially   from
expectations.   Such  factors   include  the   following:   (1)   technological,
engineering,  quality control or other  circumstances which could delay the sale
or  shipment  of  products;  (2)  economic,  business,  market  and  competitive
conditions in the software  industry and  technological  innovations which could
affect the Company's  business;  (3) the Company's  ability to protect its trade
secrets  or  other  proprietary  rights,  operate  without  infringing  upon the
proprietary   rights  of  others  or  prevent  others  from  infringing  on  the
proprietary  rights  of the  Company;  and (4)  general  economic  and  business
conditions and the availability of sufficient financing.

Item 2. Properties

The  Company   currently   leases  its  principal   facilities,   consisting  of
approximately  9,634 square feet, in Redwood Shores,  California,  pursuant to a
sub-lease  that expires in 2006. The Joint Venture  leases  approximately  1,500
square feet in Nanjing,  China. The Company believes that its current facilities
will be suitable for us to continue operations in the foreseeable future.

Item 3. Legal Proceedings

The Company was named as a defendant  in a suit brought in U.S.  District  Court
for the Southern  District of New York, filed on August 5, 2002. The plaintiffs,
Richard M. Ross and Jane Spaulder  Ross,  brought claims for breach of contract,
conversion,  negligence  and  statutory  violations,  alleging  that the Company
provided incorrect or false information to their stock broker,  thereby delaying
the sale of  plaintiffs'  shares in the  Company and causing a loss in excess of
$500 due to a drop in the value of the  shares.  While the  litigation  is in an
early stage, based on the available  information,  the Company believes that the
action is without merit and, even if plaintiffs  succeed,  the Company  believes
their  damages  will not have a material  financial  impact on us.  The  Company
intends to vigorously defend against the claims.

                                      -13-
<PAGE>

In a separate arbitration  proceeding the plaintiffs have brought similar claims
for relief against Charles Schwab & Co., Inc., their broker during the period in
question, based upon other legal theories.

Item 4. Submission of Matters to a Vote of Security Holders

     None
                                     PART II

Item 5. Market For Registrant's Common Equity and Related Stockholder Matters

As of March 14, 2003 the  Company's  common  stock was listed on the NASDAQ Over
the Counter  Bulletin Board ("OTC") under the trading symbol CICI. Prior to that
it was listed on the Nasdaq SmallCap Market under the same symbol. The following
table  sets  forth  the high and low sale  prices  of the  common  stock for the
periods noted.

                                                                 Sale Price
                                                                  Per Share
 Year    Period                                                 High      Low

 2001    First Quarter......................................   $ 2.28  $ 0.97
         Second Quarter.....................................   $ 1.63  $ 0.76
         Third Quarter......................................   $ 1.13  $ 0.64
         Fourth Quarter.....................................   $ 0.91  $ 0.60
 2002    First Quarter......................................   $ 1.18  $ 0.56
         Second Quarter.....................................   $ 1.15  $ 0.63
         Third Quarter......................................   $ 0.66  $ 0.24
         Fourth Quarter.....................................   $ 0.50  $ 0.21
 2003    First Quarter (through March 27, 2003).............   $ 0.50  $ 0.14

As of March 27,  2003,  the closing sale price of the Common Stock on the Nasdaq
OTC was $0.15 per share and there were  approximately 831 registered  holders of
the Common Stock.

To date, the Company has not paid any dividends on its Common Stock and does not
anticipate  paying  dividends in the  foreseeable  future.  The  declaration and
payment of dividends on the Common  Stock is at the  discretion  of the Board of
Directors  and will  depend on,  among other  things,  the  Company's  operating
results, financial condition, capital requirements,  contractual restrictions or
such other factors as the Board of Directors may deem relevant.

During the three months ended  December 31, 2002,  the Company did not grant any
stock options.

                                      -14-
<PAGE>



Item 6. Selected Financial Data

The selected  consolidated  financial  data  presented  below as of December 31,
2002,  2001,  2000,  1999,  and 1998 and for each of the years in the  five-year
period  ended  December  31,  2002 are  derived  from the  audited  consolidated
financial statements of the Company. The consolidated financial statements as of
December 31, 2002 and 2001, and for each of the years in the  three-year  period
ended  December 31, 2002, are included in Item 8 of this Form 10-K. The selected
consolidated  financial  data should be read in  conjunction  with the Company's
audited  financial  statements  and the notes thereto and other portions of this
Form 10-K  including  "Business"  and  "Management's  Discussion and Analysis of
Financial Condition and Results of Operations."

                                          Year Ended December 31,
                             ---------------------------------------------------
                                2002      2001       2000       1999       1998
                             ---------------------------------------------------
                                   (In thousands, except per share amounts)
Statement of Operations
 Data:
Revenues..................... $ 3,272  $  5,947   $  7,312   $  6,518   $ 4,581
Research and
  development expenses(1)....   1,485     1,808      1,603      1,363     1,989
Sales and marketing
  expenses...................   1,543     2,054      2,239      1,877     2,015
General and administrative
  expenses...................   2,424     2,791      2,181      1,683     1,889
Loss from operations.........  (3,337)   (2,946)    (1,607)    (1,722)   (3,285)
Net loss available to
 common stockholders.........  (3,561)   (3,215)    (1,799)    (1,740)   (3,592)
Basic and diluted loss
 per share...................   (0.04)    (0.04)    ( 0.02)    ( 0.02)   ( 0.06)

                                            As of December 31,
                               -------------------------------------------------
                                2002      2001      2000      1999        1998
                               -------------------------------------------------
                                              (In thousands)
Balance Sheet Data:
Cash, cash equivalents
 and restricted cash........  $   711  $  2,588   $ 2,349   $  2,374   $  1,045
Working capital(2)..........      443     3,017     3,109      3,054        346
Total assets................    7,168    10,072    11,302      4,963      3,354
Deferred revenue............      165        88        61         35        651
Long-term obligations.......    3,000     3,000     1,427      1,338          -
Stockholders' equity (3)....    2,934     6,060     8,307      2,349      1,332
___________

(1)  Excludes   software   development  costs  capitalized  in  accordance  with
     Statement of Financial Accounting Standards No. 86 of $20, $20, and $9, for
     the years ended December 31, 2001, 2000, and 1999 respectively. No software
     development costs were capitalized in the year ended December 31, 2002.

(2)  Current liabilities used to calculate working capital at December 31, 2002,
     2001, 2000, 1999, and 1998 include deferred revenue of $165, $88, $61, $35,
     and $651, respectively.

(3)  The Company has never paid dividends to the holders of its common stock.

                                      -14-
<PAGE>


Item 7. Management's  Discussion and Analysis of Financial Condition and Results
     of Operations

Unless otherwise  stated herein,  all figures in this MD& A section are rendered
in thousands ("000s").

Overview

History. The Company was initially  incorporated in Delaware in October 1986. In
each year  since  its  inception,  the  Company  has  incurred  losses.  For the
five-year  period  ended  December  31,  2002,   operating   losses   aggregated
approximately  $13 million and at December 31, 2002,  the Company's  accumulated
deficit was approximately $80 million.

Critical Accounting Policies

The  preparation of financial  statements and related  disclosures in conformity
with accounting  principles  generally  accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts  reported in the Company's  consolidated  financial  statements  and the
accompanying  notes.  The  amounts of assets  and  liabilities  reported  in its
balance sheets and the amounts of revenues and expenses reported for each period
presented are affected by these  estimates and  assumptions  which are used for,
but not  limited  to, the  accounting  for the product  returns,  allowance  for
doubtful accounts,  intangible asset impairments,  and inventory. Actual results
may differ from these estimates.  The following critical accounting policies are
significantly  affected by  judgments,  assumptions  and  estimates  used by the
Company's   management  in  the  preparation  of  the   consolidated   financial
statements.

Revenue is  recognized  when earned in  accordance  with  applicable  accounting
standards,  including  AICPA  Statement of Position  ("SOP") No. 97-2,  Software
Revenue Recognition,  as amended, Staff Accounting Bulletins 101 ("SAB 101") and
the interpretive  guidance issued by the Securities and Exchange  Commission and
EITF issue 00-21 of the AICPA Emerging Issues Task Force. The Company recognizes
revenues from sales of software products upon shipment, provided that persuasive
evidence of an arrangement exists,  collection is determined to be probable, all
nonrecurring  engineering  work  necessary  to enable the  Company  products  to
function within the customer's  application has been completed and The Company's
product has been  delivered  according to  specifications.  Revenue from service
subscriptions  is recognized  as costs are incurred or over the service  period.
Software license  agreements may contain multiple  elements,  including upgrades
and enhancements, products deliverable on a when and if available basis and post
contract support.

Revenue from software  license  agreements  is  recognized  upon delivery of the
software provided that persuasive evidence of an arrangement exists,  collection
is determined to be probable,  all  nonrecurring  engineering  work necessary to
enable the Company's products to function within the customer's  application has
been  completed and the Company has delivered its product  according to contract
specifications. Deferred revenue is recorded for upgrades, enhancements and post
contract  support,  which  is paid  for in  addition  to  license  fees,  and is
recognized  as costs are incurred or over the support  period.  Vendor  specific
objective  evidence  of the fair value for  multiple  element  software  license
agreements  is  determined  by the price  charged for the same element when sold
separately or the price determined by management  having the relevant  authority
when the element is not yet sold separately. The price established by management
for the  element  not yet sold  separately  will not  change  prior to  separate
introduction of that element into the marketplace.

Revenue  from  system  integration  activities,  which  represents  the sale and
installation of third party computer  equipment and limited  related  consulting
services,  is recognized  upon  installation  of the third party hardware and/or
software as projects are short term in nature,  provided that a contract exists,
collectibility  of the  receivable  is  reasonably  assured  and the  system  is
functioning   according  to  specifications.   Service   subscription   revenues
associated  with the system  integration  activities are recognized as costs are
incurred or over the service period.

The allowance for doubtful accounts is based on the Company's  assessment of the
collectibility of specific customer accounts and an assessment of international,
political and economic risk as well as the aging of the accounts receivable.  If
there is a change in actual defaults from the Company's  historical  experience,

                                      -16-
<PAGE>

the Company's  estimates of  recoverability  of amounts due it could be affected
and the Company will adjust the allowance accordingly.

The Company performs  intangible asset impairment  analyses on a quarterly basis
in accordance  with the guidance in Statement of Financial  Accounting  Standard
No. 142,  Goodwill and Other  Intangible  Assets  ("SFAS No. 142") and Financial
Accounting  Standard No. 144,  Accounting for the Impairment or Disposal of Long
Lived Assets ("SFAS No. 144").  The Company uses SFAS 144 in response to changes
in industry and market  conditions  that  affects its patents,  the Company then
determine if an impairment of its assets has occurred.  The Company reassess the
lives of its patents and test for  impairment  quarterly  in order to  determine
whether  the book value of each patent  exceeds  the fair value of each  patent.
Fair value is determined by estimating  future cash flows from the products that
are  and  will  be  protected  by the  patents  and  considering  the  following
additional factors:

o    whether there are legal,  regulatory or contractual  provisions known to us
     that limit the useful life of each patent to less than the assigned  useful
     life;

o    whether the Company needs to incur material costs or make  modifications in
     order for it to continue to be able to realize the  protection  afforded by
     the patents;

o    whether any effects of obsolescence or significant  competitive pressure on
     the  Company's  current  or future  products  are  expected  to reduce  the
     anticipated cash flow from the products covered by the patents;

o    whether  demand  for  products  utilizing  the  patented   technology  will
     diminish, remain stable or increase; and

o    whether  the  current  markets  for  the  products  based  on the  patented
     technology will remain constant or will grow over the useful lives assigned
     to the patents.

Customer  Base. To date,  the Company's  revenues have been derived  principally
from end-users,  manufacturers,  retailers and distributors of computer products
in North  America,  Europe and the Pacific  Rim. The Company  performs  periodic
credit evaluations of its customers and does not require collateral. The Company
maintains reserves for potential credit losses.  Historically,  such losses have
been insignificant and within management's expectations.

Software  Development  Costs.  Software  development  costs are accounted for in
accordance with Statement of Financial  Accounting Standards No. 86, "Accounting
for the Costs of Computer  Software to be Sold,  Leased or  Otherwise  Marketed"
("SFAS 86"). Under SFAS 86,  capitalization of software development costs begins
upon the establishment of technological  feasibility,  subject to net realizable
value  considerations.  The costs capitalized  include the coding and testing of
the product after the  technological  feasibility has been  established and ends
upon the release of the product.  The capitalized costs are amortized to cost of
sales on a straight-line basis over the estimated life of the product, generally
three  years.  As  of  December  31,  2002,  2001  and  2000,  such  costs  were
insignificant.

Research and Development  Costs.  Research and development  costs are charged to
expense as incurred.

Foreign Currency  Translation.  The Company considers the functional currency of
the Joint Venture to be the respective  local currency and,  accordingly,  gains
and  losses  from  the  translation  of the  local  foreign  currency  financial
statements are included as a component of "accumulated other comprehensive loss"
in the  Company's  consolidated  balance  sheets.  Foreign  currency  assets and
liabilities are translated into U.S. dollars at exchange rates prevailing at the
end of the  period,  except  for  long-term  assets  and  liabilities  that  are
translated at historical exchange rates. Revenues and expenses are translated at
the  average  exchange  rates in effect  during  each  period,  except for those
expenses included in balance sheet accounts,  which are translated at historical
exchange rates. Net foreign currency  transaction  gains and losses are included
as  components  of  "interest  income and other  income  (expense),  net" in the
Company's  consolidated  statements of  operations.  Due to the stability of the
currency in China,  net foreign currency  transaction  gains and losses were not
material for the year ended December 31, 2002, 2001 and 2000, respectively.

                                      -17-
<PAGE>

Net Operating  Loss  Carryforwards.  Utilization  of the Company's net operating
losses  may be  subject  to an annual  limitation  due to the  ownership  change
limitations  provided by the  Internal  Revenue  Code of 1986 and similar  state
provisions.  As a  result,  a  portion  of  the  Company's  net  operating  loss
carryforwards may not be available to offset future taxable income.  The Company
has provided a full valuation  allowance for deferred tax assets at December 31,
2002 of $23 million based upon the Company's history of losses.

Segments

The  Company  reports  in two  segments:  handwriting  recognition  and  systems
integration.  For purposes of Management  Discussion  and Analysis,  handwriting
recognition  includes  online/retail  revenues and  corporate  sales,  including
enterprise  and  original   equipment   manufacturers   ("OEM")  revenues.   All
handwriting   recognition  software  is  developed  around  the  Company's  core
technology.  Handwriting  recognition product revenues are generated through the
Company's  web site and a direct sales force to  individual  or  enterprise  end
users.  The  Company  also  licenses  a version of its  handwriting  recognition
software to OEM's. The handwriting  recognition  software is included as part of
the OEM's  product  offering.  From time to time,  the  Company is  required  to
develop an interface (port) for its software to run on a new customer's hardware
platform or within the customer's  software  operating  system.  The development
contract revenues are included in the handwriting  recognition  segment.  System
integration  represents  the  sale and  installation  of  third  party  computer
equipment and systems that utilize the Company's  products.  System  integration
sales are derived  through a direct  sales force that then  develops a system to
utilize the Company's  software  based on the customer's  requirements.  Systems
integration sales are accomplished solely through the Company's Joint Venture.

Results of Operations

The following  table provides  unaudited  financial  information for each of the
Company's two segments.

                                               Years Ended December 31,
                                          2002            2001          2000
                                        ---------      ---------      --------

 Handwriting recognition
  Online/retail                         $   351       $    913      $   1,198
  Corporate                               1,667          2,958          3,326
  Nonrecurring Maintenance
  fees (net)-M10 (previously PenOp)           -            352            877
  China                                     196            323            308
                                        ---------      ---------      ---------
   Total Handwriting recognition      $   2,214      $   4,546      $   5,709

Systems integration
    China Total Systems integration   $   1,058      $   1,401      $   1,603
                                        ---------      ---------      ---------

Total revenues                        $   3,272      $   5,947      $   7,312
                                        ---------      ---------      ---------

Cost of Sales
    Handwriting recognition           $     423        $   1,149    $   1,549
    Systems integration                     734            1,091        1,347
                                        ---------      ----------      --------
  Total cost of sales                 $   1,157        $   2,240     $   2,896
                                        ---------      ----------      --------

Operating cost and expenses
   Research and development           $   1,485        $   1,808     $   1,603
   Sales and Marketing                    1,543            2,054         2,239
   General and administrative             2,424            2,791         2,181
                                        ---------      ----------      --------
  Total operating costs and expenses  $   5,452        $   6,653     $   6,023
                                        ---------      ----------      --------

                                      -18-
<PAGE>



                                             Years Ended December 31,
                                        2002             2001            2000
                                     ----------      ------------   ------------
Interest and other income
 (expense) net                      $    (224)       $    (269)      $    (192)
                                     ----------      ------------   ------------

Net loss                            $  (3,561)       $  (3,215)      $  (1,799)
                                     ==========      ============   ============

Amortization of intangible assets
   Cost of sales                    $      14        $      12       $      12
   General and administrative             378              440              43
                                    -----------      ------------   ------------
Total amortization of
  intangible assets (See note 9)    $     392        $     452       $      55
                                    ===========      ============   ============


Years Ended December 31, 2002 and December 31, 2001

Revenues

     Handwriting  recognition segment.  Handwriting recognition segment revenues
include   online/retail,   corporate  and  China  software  sales.   Handwriting
recognition  segment  revenues  declined  51% or $2,332 to $2,214 for the twelve
months  ended  December 31, 2002 as compared to $4,546 in the  comparable  prior
year.

     Online/retail  revenues  declined  62% or $562 for the twelve  months ended
December 2002 compared to the prior year. This decrease was primarily due to the
curtailment  of the direct mail campaign at the end of the second  quarter 2002,
due to the reduced  availability of new names and poor sales close rate compared
to the prior year. In November of 2002,  PalmSource  replaced  Graffiti(R)  with
CIC's  Jot as the  standard  and  only  handwriting  software  on all  new  Palm
PoweredTM  devices.  The Company  believes  future  online/retail  revenues will
increase due to the Palm license  agreement as Palm  operating  system users are
expected to upgrade the software on their  devices to the Company's Jot product.
Due to the current economic conditions and poor consumer spending the timing and
amount of the anticipated  increase in  online/retail  revenues are difficult to
predict.

     Corporate  revenues  decreased  44% or $1,291 over the twelve  months ended
December 31, 2002 compared to the prior year. OEM revenues included in corporate
sales  decreased  68% or $782 over the twelve  months  ended  December  31, 2002
compared to the prior year. This decrease was primarily due to a decrease in the
amount of royalty  reported  by two of the  Company's  licensees  located in the
Pacific Rim and reduced  development  contract revenue recognized as compared to
the prior year.  The Company  believes OEM revenues will increase in 2003 due to
Palm Source's  replacement of Graffiti(R)  with the Company's Jot product as the
standard and only handwriting  software on all new Palm PoweredTM  devices.  The
poor economy and Palm's  prediction  of declines in  projected  shipments of its
products may limit or defer the Company's  anticipated increases in OEM revenues
to later in 2003.  Enterprise sales included in corporate sales decreased 28% or
$509during the twelve months ended December 31, 2002 compared to the prior year.

     The  Company  believes  the  decrease  was due to the  reduced IT  spending
resulting from the weak economy. The Company previously engaged in a transaction
with PenOp to provide nonrecurring  maintenance services from pre-existing PenOp
contracts in the aggregate  amount of $1.5  million,  of which $877 was recorded
(net) in the three months ended  December  31,  2000.  During the twelve  months
ended December 31, 2001, the Company recognized $352 in nonrecurring maintenance
fees net of expenses of $48.

     Software  sales in China  declined 39% or $127 over the twelve months ended
December  31, 2002  compared  to the prior  year.  The  decrease  resulted  from
competitive  pressures  from  local  Chinese  companies  with  similar  types of
software offerings. See Competition Handwriting Recognition Segment.

     Systems  integration  Segment.  System integration segment revenue declined
24% or $343 during the twelve  months ended  December  31, 2002  compared to the

                                      -19-
<PAGE>

prior  year.  The  decrease  was  primarily  due to a  decrease  in sales to two
customers  compared to the prior year and an increase in competition  from small
local Chinese companies. See Competition System Integration Segment.

Cost of Sales.

     Handwriting  recognition segment.  Handwriting  recognition segment cost of
sales include  online/retail,  corporate and China  software  sales costs.  Such
costs are made up of royalty  and  import tax  payments,  third  party  hardware
costs,  direct mail costs,  amortization of intangible  assets excluding patents
and  engineering  direct costs.  Cost of sales for the  handwriting  recognition
segment  decreased 63% or $726 during the twelve months ended  December 31, 2002
compared to the prior year.

     Online/retail  cost of sales  decreases 68% or $546 during the current year
compared to the twelve months ended  December 31, 2001.  The decrease was due to
the  elimination  of direct  mailing  campaign and related  costs as a result of
reductions in the number of names available and a poor sales close rate.

     Enterprise  and OEM cost of sales  decreased  67% or $193 during the twelve
months ended  December 31, 2002 compared to the prior year. The decrease was due
to the lower  sales  volumes of products  requiring  third  party  hardware  and
reduction in OEM technology  import tax and engineering  development  costs over
the twelve months ended December 31, 2002 as compared to the prior year.

     China  handwriting  recognition  segment cost of sales increased 24% or $13
during the twelve months ended December 31, 2002 compared to the prior year. The
increase is due primarily to third party hardware costs associated with the sale
of the software compared to the prior year.

Systems integration segment.

     China Systems  integration  segment cost of sales declined 33% or $357 over
the twelve  months ended  December  31, 2002 as compared to the prior year.  The
decrease  was  due  primarily  to  the  24%  decline  in  revenues  between  the
twelve-month comparable periods as discussed above.

Operating expenses

     Research  and  Development  Expenses.  Research  and  development  expenses
decreased 18% or $323 to $1,485 for the year ended December 31, 2002 as compared
to $1,808 in the prior year.  Engineering expenses consist primarily of salaries
and  related  costs,  outside  engineering,  maintenance  items,  and  allocated
facilities expenses. These expenses are offset by the capitalization of software
development  costs and direct costs  associated  with  nonrecurring  engineering
contracts  charged to cost of sales.  The decrease was due  primarily due to the
71%  or  $245  reduction  in  outside  engineering  costs  associated  with  the
assimilation of the PenOp intellectual  property into the Company's products. In
addition,  salaries  and related  expenses  decreased  $123,  or 11%, due to the
reduction in head count of a total of 3 engineers  compared to the  twelve-month
period  of the  prior  year.  Software  development  costs  capitalized  in 2002
declined 100% or $20 compared to 2001. Direct costs associated with nonrecurring
engineering  contracts  charged to cost of sales  declined 64% or $68 during the
twelve  months ended  December 31, 2002 as compared to the twelve  months in the
prior year. Travel,  maintenance and allocated  facilities expenses declined $43
in 2002 as compared to the twelve months in 2001.  These  decreases  were due to
reduced  activity and spending  resulting from lower sales  experienced in 2002,
compared to the twelve months in 2001.

     Sales and Marketing Expenses.  Sales and marketing expenses declined 25% or
$511 to $1,543 for the twelve months ended  December 31, 2002 compared to $2,054
for the twelve months in 2001. Sales and marketing expenses consist of salaries,
commissions  and  related  expenses,   professional  services,  advertising  and
promotion,  general office and allocated facilities  expenses.  The decrease was
primarily due to 57% or $245 decrease in  professional  services and advertising
expenses  over the twelve  months ended  December 31, 2002 compared to the prior
year period. The decrease was due to non-recurring  expense of a marketing study
completed in the prior year and the reduction in resource  guide  advertisements
included in the box that  accompanies  third party handheld  devices.  Salaries,
commissions  and related  expenses  declined 10% or $85 in 2002  compared to the


                                      -20-
<PAGE>

twelve  months ended  December 31, 2001.  The decrease was due to a reduction in
personal  of 2 sales  persons  in the  third  quarter  of  2002  as the  Company
attempted  to trim  expenses  in  response  to a  weakening  economy.  Allocated
facilities and general office  expenses  decreased 23% or $180 during the twelve
months ended  December 31, 2002 as compared to the prior year.  The decrease was
primarily due to the one time charge in 2001 in recruiting  costs and a decrease
in the  allocated  facilities  expenses  compared  to the  twelve  months  ended
December 31, 2001.  The  Company's  sales  efforts  have been  directed  towards
customers  that have  previously  purchased  products and  currently  have pilot
programs in process  utilizing  the  Company's  software.  These  customers  are
expected to purchase additional software products once they have completed their
studies and implement  their software  solutions.  The Company  believes that an
improving  economy and the current  number of customer  pilot  programs  nearing
completion  will provide  future  revenues  over a period of time  sufficient to
allow us to timely expand the Company's  sales efforts to generate the potential
new demand.

     General and Administrative  Expenses.  General and administrative  expenses
decreased 13% or $368 to $2,424 for the twelve  months ended  December 31, 2002,
compared  to  $2,791 in the  prior  year.  General  and  administrative  expense
consists of salaries,  professional fees,  investor relations  expenses,  patent
amortization  and  office and  allocated  facilities  costs.  The  decrease  was
primarily due to lower professional  service fees resulting from the resignation
of the  former  Chairman  of the Board and the  elimination  of $159 in  related
salary and office fees and $51 in other  professional fees. In addition investor
relations  expenses  decreased  47% or $172  compared to the twelve months ended
December 31, 2001. The decrease was due to nonrecouring expenses in 2001 related
to an aborted  financing and reductions in the costs associated with shareholder
communications.   Other  office  expenses  and  allocated   facilities  expenses
decreased 5% or $53 over the twelve  months ended  December 31, 2002 compared to
the prior  year.  These  reductions  were  offset by an 11% or $67  increase  in
payroll and related cost associated with salary increases.

Interest Income and Other Income (Expense), Net

     Interest  and other  income  (expense)  net  decreased  16% or $45 over the
twelve months ended  December 31, 2002 compared to the prior year.  The decrease
was  primarily  due to the decrease in the interest  rate paid on the  Company's
$3,000 debt over the year.

Years Ended December 31, 2001 and December 31, 2000

Revenues

     Handwriting  recognition  segment.  Revenues  declined  $1,163,  or 20%, to
$4,546 during the twelve  months ended  December 31, 2001, as compared to $5,709
for the twelve months ended December 31, 2000 as described below.

     Online revenues  declined $285, or 24%, to $913 for the twelve months ended
December 31, 2001,  as compared to $1,198 for the twelve  months ended  December
31,  2000.  This  reduction  is  primarily  attributable  to the smaller  target
population of Palm Users available for the Company's direct mail campaign.  This
population was smaller than the available population in the year 2000 due to the
decline in Palm operating system  shipments during 2001.  Future Online revenues
are expected to remain weak until the number of shipments of the Palm  operating
system increase or a more cost effective way to further  penetrate the installed
base is devised.

     Corporate  sales,  which  includes   enterprise  sales  and  OEM  revenues,
decreased $893 or 21%, to $3,310  (including the  nonrecurring  maintenance fees
from M10,  previously  PenOp) for the year ended December 31, 2001,  compared to
$4,203 in the prior year period.  Sales of the Company's  software solutions and
maintenance to end users included in corporate sales increased $155 to $2,076 in
2001 compared to $1,921 in the prior year period. The decrease was due primarily
to a $524  decrease  in the  nonrecurring  maintenance  fees,  from  M10 in 2001
compared to the prior year.  This decrease was offset by sales to Prudential and
TVA.  During the fourth  quarter of 2000,  the Company  engaged in a transaction
with PenOp to provide nonrecurring  maintenance services from pre-existing PenOp
contracts in the aggregate  amount of $1.5  million,  of which $352 and $877 was


                                      -21-
<PAGE>

recorded (net) in 2001 and 2000,  respectively.  The Company  previously entered
into a separate  transaction to acquire the  intellectual  property  rights from
PenOp  (see  note 1 to  the  audited  consolidated  financial  statements).  OEM
revenues included in corporate sales decreased $989 or 48% to $1,078 from $2,067
in the prior year period.  This decrease was due to a reduction in the amount of
revenues  recognized  from Ericsson and other OEM's  compared to the prior year.
Revenues from development contracts included in corporate sales decreased $59 or
27% to $156  from  $215  for the  prior  year  due  primarily  to  decreases  in
non-recurring engineering revenues.  Revenues from development contracts in 2001
and 2000 were  primarily  attributable  to porting of the Company's  software to
third party products such as smartphones and web browsers.

     China  handwriting  recognition  segment sales increased $15, or 5% to $323
for the twelve  months  ended  December  31,  2001,  as compared to $308 for the
twelve months ended  December 31, 2000.  The changes in revenues are not related
to any single customer.

     Systems  integration  segment.  China  systems  integration  segment  sales
decreased  $202, or 13%, to $1,401 for the twelve months ended December 31, 2001
as  compared  to $1,603 for the twelve  months  ended  December  31,  2000.  The
decrease  is due to  lower  sales  activity  and is not  related  to any  single
customer.

Cost of Sales.

     Handwriting  recognition  segment.  Cost of sales decreased $400, or 26% to
$1,149 for the year ended  December  31,  2001,  as  compared  to $1,549 for the
twelve month period ended December 31, 2000, as described below.

     Online cost of sales  decreased  $282, or 26%, to $805 in 2001, as compared
to  $1,087 in the prior  year.  This  decrease  was due to lower  mailing  costs
brought about by the reduced  number of new names  available in 2001 as compared
to 2000.  Corporate sales costs decreased $126, or 30%, to $290 from $416 in the
prior year.

     Costs associated with the Company's  signature software solutions decreased
$36, or 21%, to $135, compared to $171 in the prior year period. The decrease in
the cost of  software  solutions  was due to a decrease in amount of third party
hardware costs sold with the Company's  corporate  signature  software  products
during 2001 as compared to 2000.  Amortization of capitalized software costs was
approximately $12 in 2001 and 2000, respectively.  Costs of development contract
revenues  included in corporate sales decreased $85, or 45%, to $105 in 2001, as
compared to $190 in the prior year.  The decrease in  development  contract cost
was due to the reduction in  non-recurring  engineering  projects during 2001 as
compared  to the prior  year  period.  OEM costs  included  in  corporate  sales
decreased $5, or 12%, to $38 as compared to $43 in the prior year.  The decrease
was due to a decrease in revenues and the associated  technology import tax from
the Company's Japanese OEM customers.

     China handwriting recognition cost of sales increased $8, or 17%, to $54 in
the twelve  months ended  December  31, 2001,  as compared to $46 for the twelve
months ended December 31, 2000. The increase was due to the increase in software
sales in 2001 as compared to the prior year.

     Systems integration segment.  Cost of sales decreased $256 or 19% to $1,091
as compared to $1,347 in the prior year. The decrease is due to the lower system
integration segment sales realized in 2001 as compared to the prior year.

Operating expenses

     Research  and  Development  Expenses.  Research  and  development  expenses
increased $205, or 13%, to $1,808 for the twelve months ended December 31, 2001,
as compared to $1,603 for the prior year.  Salaries and related costs  decreased
$104,  or 9%, to $1,077 in 2001,  compared to $1,181 in 2000.  This decrease was
due to  reductions  in headcount  during 2001 as compared to 2000.  Other costs,
including shared  development  costs with the Joint Venture,  facility and other
costs  increased  $255 to $342 in 2001,  compared to $87 in the prior year.  The
increase was due  primarily to outside  engineering  costs  associated  with the
assimilation of the PenOp intellectual  property into the Company's products and
continued support for new engineering projects.  Other expenses including travel
and related expenses and  depreciation  decreased 6%, or $30, as compared to the
prior year period. In addition,  costs associated with development contracts and
charged  to  cost  of  sales  decreased  $84 or 44% to  $106  from  $190  in the
comparable prior year period. This decrease was due to a lower number of revenue
generating nonrecurring-engineering projects in 2001 compared to the prior year.

                                      -22-
<PAGE>

     Sales and Marketing  Expenses.  Sales and  marketing  expenses for the year
ended December 31, 2001 decreased $185, or 8%, to $2,054,  as compared to $2,239
in the prior year.  Payroll and related costs  decreased 12%, or $93, to $696 in
2001 from $789 due primarily to a decrease in headcount during the year.  Travel
and related expenses decreased $58, or 29%, to $140 in 2001, compared to $198 in
the prior year.  The  decrease  was due to  decreases  in travel  related to the
reduction in headcount from the comparable prior year. Advertising and promotion
expense  decreased  $195, or 49%, to $203 in 2001,  from $398 in the prior year.
The decrease was due  primarily to the  one-time  cost of the  development  of a
media  campaign in the prior year  related to the  Company's  On-line  sales via
CIC's website.  Professional  services expense  increased $128, or 129%, to $227
from $99 in the comparable prior year period.  The increase was due to marketing
studies  undertaken  by the  Company to assess  the  markets  with the  greatest
potential  for the  Company's  products.  Other costs,  such as  facilities  and
miscellaneous  expenses,  increased $33, or 5%, in 2001 as compared to the prior
year.

     General and Administrative  Expenses.  General and administrative  expenses
increased  28%, or $610,  to $2,791 for the year ended  December 31, 2001,  from
$2,181 for the prior year.  The  increase  was  primarily  due to an increase in
patent  amortization  expense of $393,  or 914%, to $436 in 2001 from $43 in the
prior year. In addition, professional fees increased $274, or 105%, to $535 from
$261 in the comparable prior year period. Investor relation's expenses decreased
$66, or 15%, to $366 in 2001, as compared to $432 in the comparable  prior year.
The  decrease  was  due  primarily  to a  reduction  in  costs  associated  with
information  disseminated  through the wire services.  Other expenses  including
travel, facilities cost and provision for uncollectible accounts increased $9 in
2001 as compared to the prior year.

     Interest Income and Other Income (Expense),  Net. Interest income and other
income  (expense) net,  decreased  $60, or 79%, to $16 in 2001,  from $76 in the
prior year. This decrease resulted from a decrease in cash balances and interest
rates during the year. The interest  income was offset by fees  associated  with
credit  card sales from the  Company's  website  of  approximately  $37 in 2001,
compared to $49 in the prior year.

     Interest  Expense.  Interest expense increased $16, or 6%, in 2001, to $282
from $266 in the prior year.  This increase was due to the increase in long-term
debt outstanding since June of 2001.

Liquidity and Capital Resources

     Cash and cash  equivalents  at December 31, 2002 totaled $711,  compared to
cash and cash  equivalents  of $2,588 at  December 31,  2001.  This decrease was
primarily  attributable  to $2,087 of cash used in  operations,  and $30 of cash
used in investing  activities.  These cash outflows were offset by $240 provided
by  financing  activities,  the  effect of  exchange  rate  changes  on cash was
immaterial.  The cash used in operations was primarily due to the loss of $3,094
net of depreciation and amortization of $467, an increase in prepaid expenses of
$105 and a  reduction  in  accounts  payable  of $46,  offset by a  decrease  in
accounts  receivable  and  other  assets  of $566 and  $156,  respectively,  and
increases  in other  accrued  liabilities  of $295.  The cash used in  investing
activities of $30 was to purchase  computer  equipment and third party  software
for internal use. The $240 provided by financing  activities consisted primarily
of $426 in proceeded  from the exercise of stock options offset by the repayment
of $181 in short-term debt by the Joint Venture. Prepaid expenses increased $105
due to  professional  fees  associated  with the S1  registration  statement and
payments for certain maintenance  contracts associated with third party software
used  in the  Company's  operations.  Accounts  receivable  decreased  $566  due
primarily to lower sales during the fourth.

Financing.

     In July 2002, the Company  negotiated a Line of Credit  Agreement  expiring
two years from the date of an  effective  registration  statement  with  Cornell
Capital Partners,  LP ("Line of Credit")(see Note 1, to the Financial Statements
"Equity Line of Credit Agreement").  The Company may periodically issue and sell
shares of its common stock for a total purchase price of $15 million, subject to
the number of shares  available  for  issuance  and the  purchase  price of such
shares.  The maximum  amount of each advance is $1 million in any 30-day period.
The Company must pay to Cornell Capital  Partners,  L.P. an advance fee equal to
6.5% of the amount of each advance.  The Company filed a Registration  Statement
on Form S1  covering  approximately  24 million  shares for use under the equity


                                      -23-
<PAGE>

line of credit.  On February  13, 2003 the Form S1 was declared  effective.  The
Company intends to use the proceeds from the equity line to repay short and long
term debt and for working capital  purposes to the extent that future cash flows
from operations fall short of the Company's expectations.

     The Company has entered into a Registration  Rights  Agreement with Cornell
Capital  Partners,  LP. The Company  cannot sell any shares of its common  stock
under the Line of Credit until a registration statement is declared effective by
the  Securities  and  Exchange   Commission   (See  note  13  to  the  Financial
Statements).  The  Company  is  required  to  keep  the  registration  statement
effective  until the  earlier  of when the  investor  has sold all of the shares
acquired  under the Line of Credit or the  investor is able to resell the shares
under Rule 144 without regard to the volume  limitations set forth in that rule.
At all times, the registration statement must cover, at a minimum, the number of
shares  issued under the Line of Credit.  The Company is required to fulfill its
reporting obligations under the Securities Exchange Act of 1934, as amended, and
otherwise take whatever steps are necessary to enable the investor to resell the
shares  acquired  under the Line of Credit  without  restriction.  Finally,  the
Company has agreed to  indemnify  the  investor for any damages the investor may
suffer as a result of  misstatements or omissions,  other than  misstatements or
omissions  attributable  to the investor.  Subsequent to December 31, 2002,  the
Company  borrowed $1 million  dollars  less a 6.5%  financing  fee from  Cornell
Capital Partners,  LP. The loan will be paid back over a ten-week period through
draws on the equity line of credit on a prorata basis.

     On August 23, 2001,  the  Company's  90% owned Joint  Venture  borrowed the
aggregate  equivalent of $181,  denominated in Chinese currency,  from a Chinese
bank. The loan bore interest at 5.37% per annum and was due August 23, 2002. The
borrowing did not require the Joint Venture to deposit a  compensating  balance.
In February  2002,  the Joint Venture  repaid $121 and in August 2002,  paid the
remaining equivalent of $60 denominated in Chinese currency.

     On June 19, 2001, the Company consummated a three-year $3 million financing
(the "Loan") with a charitable remainder annuity trust of which the trustee is a
former director and former officer of the Company (the "Trust"). The proceeds of
the Loan were used to refinance $1,500 of indebtedness  outstanding to the Trust
pursuant  to a loan made by the Trust to the  Company in October  1999,  and for
working  capital  purposes.  The Loan bears  interest at the rate of 2% over the
prime rate  publicly  announced  by Citibank N. A. from time to time,  which was
6.75% per annum at December 31, 2002,  and is due June 18, 2004. The Loan may be
pre-paid by the Company in whole or in part at any time without penalty, subject
to the right of the Trust to convert  the  outstanding  principal  amount of the
Loan into shares of common stock.  Pursuant to the terms of the Loan,  the Trust
has the option, at any time prior to maturity,  to convert all or any portion of
the outstanding  principal amount of the Loan into shares of common stock of the
Company at a conversion price of $2.00 per share, subject to adjustment upon the
occurrence  of certain  events.  If, prior to maturity of the Loan,  the Company
consummates  one or more  financings  providing  $5  million  or  more in  gross
proceeds,  the Company is required to apply 50% of the  proceeds in excess of $5
million  to the then  outstanding  principal  amount  of the  Loan.  The Loan is
secured  by a  first  priority  security  interest  in  and  lien  on all of the
Company's  assets  as  now  owned  or  hereafter  acquired  by the  Company.  In
connection  with the  Loan,  the  Company  entered  into a  registration  rights
agreement  with the Trust which  obligates  the  Company to file a  registration
statement with the Securities and Exchange  Commission  covering the sale of the
shares of the Company's  common stock issuable upon conversion of the Loan if it
receives a demand by the holder of the Loan to do so, and to use its  reasonable
best efforts to cause such registration statement to become effective.

                                      -24-
<PAGE>

Contractual Obligations.

     The Company had the following material commitments as of December 31, 2002

                                           Payments due by periods
------------------------------   -----------------------------------------------
                                             Less    One to    Four to    After
                                             than    three       five     five
 Contractual obligations           Total   One year  years       years    years
-----------------------------    -------   --------  -------   -------   -------

 Long term debt (1)                $ 3,000   $   -   $  3,000   $   -    $    -
 Capital Lease Obligations              38       6         23        9        -
 Operating lease commitments (2)     1,663     407      1,256        -        -
                                   --------  ------   ---------  ------  -------
 Total contractual
 cash obligations                  $ 4,701  $  413   $  4,279   $    9   $    -
                                   ========  ======   =========  ======  =======

1.   The  long-term  debt may be  pre-paid by us in whole or in part at any time
     without penalty,  subject to the right to convert the outstanding principal
     amount  into  shares of  common  stock at a  conversion  price of $2.00 per
     share, subject to adjustment upon the occurrence of certain events.

2.   The operating  lease  commenced on November 1, 2002.  The cost of the lease
     will increase  approximately 3% per annum over the term of the lease, which
     expires on October 31, 2006.

     The  Company  leases  facilities  in the United  States and China  totaling
approximately  11,100 square feet.  The Company's  rental  expense for the years
ended December 31, 2002, 2001 and 2000 was  approximately  $418,  $443, and 390,
respectively. Sublease income was approximately $35 and $104 for the years ended
December 2001 and 2000, respectively. In addition to the base rent in the United
States, the Company pays a percentage of the increase, if any, in operating cost
incurred by the landlord in such year over the  operating  expenses  incurred by
the landlord in the base year.  The Company  believes the leased offices will be
adequate for the Company's needs over the term of the lease.

     As of December 31,  2002, the Company's  principal  source of liquidity was
its cash and cash  equivalents  of $711.  Subsequent  to December 31, 2002,  the
Company  filed a  Registration  Statement on Form S1 as discussed  above In each
year since the Company's  inception,  the Company has incurred losses.  Although
there can be no  assurance,  the  Company  believes  that its  current  cash and
resources,  together with the expected revenue levels,  will provide  sufficient
funds for planned  operations for at least the next twelve months.  However,  if
the  Company  is unable  to  generate  adequate  cash  flow  from  sales,  or if
expenditures  required  achieving the Company's plans are greater than expected,
the  Company  may  need to  obtain  additional  funds  or  reduce  discretionary
spending. There can be no assurance that additional funds will be available when
needed, or if available will be on favorable terms or in the amounts the Company
may required.  If adequate funds are not available when needed,  the Company may
be required to delay,  scale back or eliminate  some or all of its marketing and
development  efforts or other  operations,  which could have a material  adverse
effect on the Company's business, results of operations and prospects.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

     Interest Rate Risk. The Company has an investment portfolio of fixed income
securities that are classified as cash equivalents.  These securities,  like all
fixed  income  instruments,  are subject to interest  rate risk and will fall in
value if the market interest rates increase.  The Company attempts to limit this
exposure by investing  primarily in short-term  securities.  The Company has not
entered into any short-term security  investments during the year ended December
31, 2002.  Foreign Currency Risk. The Company operates a subsidiary in China and
from time to time makes certain capital equipment or other purchases denominated
in foreign  currencies.  As a result,  the Company's cash flows and earnings are
exposed to fluctuations in interest rates and foreign  currency  exchange rates.
The Company attempts to limit these exposures through operational strategies and
generally has not hedged currency exposures.

                                      -25-
<PAGE>

     Future  Results  and Stock  Price Risk.  The  Company's  stock price may be
subject to  significant  volatility.  The public stock markets have  experienced
significant  volatility  in stock  prices in recent  years.  The stock prices of
technology companies have experienced  particularly high volatility,  including,
at times,  severe price  changes that are unrelated or  disproportionate  to the
operating  performance  of such  companies.  The trading  price of the Company's
common stock could be subject to wide  fluctuations  in response to, among other
factors,  quarter-to-quarter  variations in operating results,  announcements of
technological  innovations  or new  products by the Company or its  competitors,
announcements of new strategic  relationships by the Company or its competitors,
general conditions in the computer industry or the global economy generally,  or
market volatility unrelated to the Company's business and operating results.


Item 8. Financial Statements and Supplementary Data

     The Company's audited consolidated financial statements for the years ended
December 31,  2002,  2001,  and 2000 begin on page F-1 of this Annual  Report on
Form 10-K.

Item 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
     Financial Disclosure

        None

                                    PART III

Item 10. Directors and Executive Officers of the Registrant

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders to be held on June 23, 2003.

Item 11. Executive Compensation

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders to be held on June 23, 2003.

Item 12. Security Ownership of Certain Beneficial Owners and Management

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders to be held on June 23, 2003.

Item 13. Certain Relationships and Related Transactions

     Information  with respect to this Item is  incorporated by reference to the
Company's  definitive  proxy  statement  with  respect to its Annual  Meeting of
Stockholders to be held on June 23, 2003.

Item 14. Controls and Procedures

     Under  the  supervision  and  with  the   participation  of  the  Company's
management,  including the Company's Chief Executive Officer and Chief Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures pursuant to applicable rules under the
Securities Exchange Act of 1934, as amended,  within 90 days of the date of this
report.  Based on that  evaluation,  the Company's Chief  Executive  Officer and
Chief  Financial  Officer  have  concluded  that these  disclosure  controls and
procedures  are effective.  There were no  significant  changes in the Company's
internal controls or in other factors that could  significantly  affect internal
controls subsequent to the date of their evaluation.

                                      -26-
<PAGE>

                                     PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

                          Index to Financial Statements

                                                                          Page
(a)(1) Financial Statements
       Report of Stonefield Josephson, Inc.,
       Independent Auditor............................................     F-1
       Consolidated Balance Sheets at December31,
       2002 and 2001..................................................     F-2
       Consolidated Statements of Operations for the
       years ended December31, 2002, 2001, and 2000..................     F-3
       Consolidated Statements of Changes in Stockholders'
       Equity (Deficit) for the years ended
       December31, 2002, 2001 and 2000...............................     F-4
       Consolidated Statements of Cash Flows for the years
 ended December 31, 2002, 2001 and 2000..     F-5
       Notes to Consolidated Financial Statements.....................     F-6
(a)(2) Financial Statement Schedule
       Schedule II Valuation and Qualifying Accounts and Reserves.....     S-1

(b) Reports on Form 8-K

     None

(c) Exhibits

   Exhibit                                               Document
   Number

2.0  Second Amended Plan of Reorganization of the Company,  incorporated  herein
     by reference to the Company's Form 8-K filed October 24, 1994.
2.1  Orderly  Liquidation  Valuation,  Exhibit F to the Second  Amended  Plan of
     Reorganization,  incorporated herein by reference to the Company's Form 8-K
     filed October 19, 1994.
2.2  Order Confirming Plan of Reorganization,  incorporated  herein by reference
     to the Company's Form 8-K filed November 14, 1994.
3.1  Certificate  of  Incorporation  of the  Company,  as amended,  incorporated
     herein by reference  to Exhibits  3.1,  3.2,  3.3 and 3.4 to the  Company's
     Registration Statement on Form 10 (File No. 0-19301).
3.2  Certificate  of Amendment to the  Company's  Certificate  of  Incorporation
     (authorizing the  reclassification  of the Class A Common Stock and Class B
     Common  Stock into one class of Common  Stock) as filed  with the  Delaware
     Secretary of State's office on  November 1,  1991,  incorporated  herein by
     reference to Exhibit 3 to Amendment 1  on Form 8 to the Company's  Form 8-A
     (File No. 0-19301).
3.3  By-laws of the Company adopted on October 6,  1986,  incorporated herein by
     reference to Exhibit 3.5 to the Company's Registration Statement on Form 10
     (File No. 0-19301).
4.1  1984 Stock  Option  Plan of the  Company,  as amended  and  restated  as of
     October 15,  1987 and as amended by resolutions of the  stockholders of the
     Company  passed on  August 15,  1989 and  October 8,  1990 to increase  the
     aggregate  shares  covered  thereby to  1,000,000,  incorporated  herein by
     reference to Exhibit 4.4 to the Company's Registration Statement on Form 10
     (File No. 0-19301).
4.2  Form of Stock  Option  Grant  under 1984 Stock  Option  Plan,  incorporated
     herein by reference to Exhibit 4.5 to the Company's  Registration Statement
     on Form 10 (File No. 0-19301).
4.3  1991 Stock Option Plan of the Company,  incorporated herein by reference to
     Exhibit 4.5 of the Company's Form S-1 dated December 23, 1991 (Registration
     No. 33-43879).
4.4  1991 Non-Discretionary  Stock Option Plan, incorporated herein by reference
     to  Exhibit 4.6  of  the  Company's   Form S-1  dated   December 23,   1991
     (Registration No. 33-43879).


                                      -27-
<PAGE>

4.5  Form of  Incentive  Stock  Option  Grant  under  1991  Stock  Option  Plan,
     incorporated  herein by reference to Exhibit 4.7 of the Company's  Form S-1
     dated December 23, 1991 (Registration No. 33-43879).
4.6  Form of  Non-Qualified  Stock  Option  Grant under 1991 Stock  Option Plan,
     incorporated  herein by reference to Exhibit 4.8 of the Company's  Form S-1
     dated December 23, 1991 (Registration No. 33-43879).
4.7  Form of Stock Option Grant under 1991 Non-Discretionary  Stock Option Plan,
     incorporated  herein by reference to Exhibit 4.9 of the Company's  Form S-1
     dated December 23, 1991 (Registration No. 33-43879).
4.8  1994 Stock  Option Plan,  incorporated  herein by reference to Exhibit G of
     the Company's Second Amended  Disclosure  Statement filed on Form 8-K dated
     October 19, 1994 and approved by shareholders on November 14, 1994.
4.9  Form of Warrant of the Company  dated  March 28,  1997 issued in connection
     with the  Waiver by and  among the  Company  and the  signatories  thereto,
     incorporated  herein by  reference to  Exhibit 4.9  of the  Company's  1996
     Form 10-K (File No. 0-19301).
4.10 1999 Stock  Option Plan,  incorporated  herein by reference to Exhibit A of
     the Company's  Definitive Proxy Statement filed on May 4, 1999 and approved
     by shareholders on June 7, 1999. .
10.1Licensing  and  Development  Agreement  for Use and  Marketing  of  Program
     Materials dated  September 25,  1992 between the Company and  International
     Business  Machines   Corporation,   incorporated  herein  by  reference  to
     Exhibit 10.13 of the Company's 1992 Form 10-K (File No. 0-19301)
10.2 Standby Stock Purchase  Agreement  between the Company and Philip  Sassower
     dated October 3, 1994, incorporated herein by reference to Exhibit 10.13 of
     the Company's 1994 Form 10-K (File No. 0-19301)
10.3 Form of  Subscription  Agreement  between the  Company and the  Purchasers,
     dated November 28,  1995,  incorporated herein by reference to Exhibit 1 of
     the Company's Form 8-K dated November 28, 1995.
10.4 Form  of  Registration   Rights  Agreement  between  the  Company  and  the
     Purchasers,  dated November 28,  1995,  incorporated herein by reference to
     Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
10.5 Form of  Warrant  of the  Company  issued  to Libra  Investments,  Inc.  on
     November 28,  1995,  incorporated  herein by  reference to Exhibit 1 of the
     Company's Form 8-K dated November 28, 1995.
10.6 Form of  Registration  Rights  Agreement  between  the  Company  and  Libra
     Investments,   Inc.,  dated  November 28,   1995,  incorporated  herein  by
     reference to Exhibit 1 of the Company's Form 8-K dated November 28, 1995.
10.7 Form of Subscription  Agreement between the Company and various  investors,
     dated June 13,  1996,  incorporated herein by reference to Exhibit 1 of the
     Company's Form 8-K dated June 27, 1996.
10.8 Form of  Registration  Rights  Agreement  between  the  Company and various
     investors,  dated  June 13,  1996,  incorporated  herein  by  reference  to
     Exhibit 2 of the Company's Form 8-K dated June 27, 1996.
10.9 Form of Preferred  Stock  Investment  Agreement,  dated as of  December 31,
     1996,  between the Company and the investors listed on Schedule 1  thereto,
     incorporated  herein by reference to  Exhibit 1 of the  Company's  Form 8-K
     dated December 31, 1996.
10.10Form  of  Registration   Rights  Agreement  between  the  Company  and  the
     Investors Listed on Schedule 1 thereto, incorporated herein by reference to
     Exhibit 2 of the Company's Form 8-K dated December 31, 1996.
10.11Form of  Certificate  of  Designation of the Company with respect to the 5%
     Cumulative Convertible Preferred Stock, incorporated herein by reference to
     Exhibit 3 of the Company's Form 8-K dated December 31, 1996.
10.12Waiver,  dated March 26,  1997, effective  December 31,  1996, by and among
     the Company and the signatories  thereto,  incorporated herein by reference
     to Exhibit 10.19 of the Company's 1996 Form 10-K (File No. 0-19301).


                                      -28-
<PAGE>

10.13Form of  Subscription  Agreement  between the Company and each  subscriber,
     dated as of November 25,  1997, incorporated herein by reference to Exhibit
     10.1 of the Company's Form 8-K dated December 3, 1997.
10.14Certificate of  Designations of the Company with respect to the Series B 5%
     Cumulative Convertible Preferred Stock, incorporated herein by reference to
     Exhibit 10.2 of the Company's Form 8-K dated November 13, 1997.
10.15Form of  Registration  Rights  Agreement,  by and among the Company and the
     signatories thereto, dated as of November 25,  1997, incorporated herein by
     reference  to Exhibit  10.3 to the  Company's  Form 8-K dated  November 13,
     1997.
10.16Amendment to the Company's  Certificate of Designation  with respect to the
     5% Cumulative Convertible Preferred Stock dated June 12, 1998, incorporated
     herein by reference to  Exhibit 10.23 of the Company's 1998 Form 10-K (File
     No. 0-19301).
10.17Amendment   to  the   Company's   Amended  and  Restated   Certificate   of
     Incorporation  dated June 12,  1998  incorporated  herein by  reference  to
     Exhibit 10.24 of the Company's 1998 Form 10-K (File No. 0-19301).
10.18Employment  Agreement  dated  August  14,  1998  between  James Dao and the
     Company  incorporated herein by reference to Exhibit 10.25 of the Company's
     1998 Form 10-K (File No. 0-19301).
**810.19  Software  Development  and License  Agreement  dated  December 4, 1998
     between  Ericsson  Mobile  Communications  AB and the Company  incorporated
     herein by reference to Exhibit 10.26 of the Company's  1998 Form 10-K (File
     No. 0-19301).
10.20Loan and Warrant  Agreement  dated October 20, 1999 between the Company and
     the Philip S. Sassower 1996 Charitable Remainder Annuity Trust.
10-21Asset Purchase  Agreement  between the Company and PenOp Ltd and PenOp Inc.
     incorporated herein by reference to the Company's Form 8-K dated October 6,
     2000.
10-22Loan  Agreement  dated June 19, 2001  between the Company and the Philip S.
     Sassower 1996 Charitable Remainder Annuity Trust.
10-23Equity Line of Credit  Agreement  between  the Company and Cornell  Capital
     Partners,  LP,  incorporated  by  reference to the  Company's  Registration
     Statement on Form S1 dated February 13, 2003 (File No. 333-103157)
*21.1 Schedule of Subsidiaries.
*23.1Consent  of  Stonefield  Josephson,  Accountancy  Corporation,  Independent
     Accountants.


**   Confidential  treatment  of  certain  portions  of this  exhibit  have been
     previously  granted pursuant to a request for  confidentiality  dated March
     29, 1993, filed pursuant to the Securities Exchange Act of 1934.

*    Filed herewith.

***  Confidential  treatment  of  certain  portions  of this  exhibit  have been
     requested  from the SEC  pursuant  to a request for  confidentiality  dated
     March 30, 1999, filed pursuant to the Securities and Exchange Act of 1934.


                                      -29-
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned; thereunto duly authorized, in the City of Redwood
Shores, State of California, on March 28, 2003.

                                     Communication Intelligence Corp.
                                     By:   /s/ Francis V. Dane
                                               Francis V. Dane
                                   (Principal Financial Officer and Officer
                           Duly Authorized to Sign on  Behalf of the Registrant)

                            CERTIFICATION PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the annual report of Communication  Intelligence  Corporation
(the "Company") on Form 10-K for the year ended December 31, 2002, as filed with
the Securities  and Exchange  Commission on the date hereof (the  "Report"),  I,
Francis V. Dane,  Principal  Financial Officer,  certify,  pursuant to 18 U.S.C.
1350, as adopted  pursuant to 906 of the Sarbanes Oxley Act of 2002, that to the
best of my knowledge:

(1)  The Report fully complies with the  requirements  of section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information  contained in the Report fairly  presents,  in all material
     respects, the financial condition and results of operations of the Company.


By: /s/Francis V. Dane
        Principal Financial Officer

In connection with the annual report of Communication  Intelligence  Corporation
(the "Company") on Form 10-K for the year ended December 31, 2002, as filed with
the Securities  and Exchange  Commission on the date hereof (the  "Report"),  I,
Guido DiGregorio,  Chairman and Chief Executive Officer, certify, pursuant to 18
U.S.C.  1350, as adopted pursuant to 906 of the Sarbanes Oxley Act of 2002, that
to the best of my knowledge:

(1)  The Report fully complies with the  requirements  of section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information  contained in the Report fairly  presents,  in all material
     respects, the financial condition and results of operations of the Company.


By: /s/Guido DiGregorio
   Chairman and Chief Executive Officer

                                      -30-
<PAGE>


                                   SIGNATURES


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the  following  persons on behalf of  Registrant
and in the capacities indicated on March 28, 2003.

     Signature                                 Title


/s/ Guido DiGregorio            Chairman, President and Chief Executive Officer
    Guido DiGregorio                (Principal Executive Officer)

/s/ Francis V. Dane             Chief Legal Officer and Chief Financial Officer
    Francis V. Dane                 (Principal Financial and Accounting Officer)

/s/ Michael Farese              Director
    Michael Farese

/s/ Louis Panetta               Director
    Louis Panetta

/s/ Chien Bor Sung              Director
    Chien Bor Sung



                                      -31-
<PAGE>




                                 CERTIFICATION


I,   Francis V. Dane, certify that:


1.   I  have  reviewed  this  Annual  Report  on  Form  10-K  of   Communication
     Intelligence Corporation;


2.   Based on my  knowledge,  this  Annual  Report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this Annual Report;


3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this Annual Report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this Annual Report;


4.   The  registrant's  other  certifying  officer  and  I  am  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


a)   Designed such  disclosure  controls and  procedures to ensure that material
     information   relating  to  the  registrant,   including  its  consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the  period  in which  this  annual  report  is being
     prepared;


b)   Evaluated the  effectiveness  of the registrant's  disclosure  controls and
     procedures  as of a date  within 90 days prior to the  filing  date of this
     annual report (the "Evaluation Date"); and


c)   Presented in this annual report our conclusions  about the effectiveness of
     the disclosure  controls and  procedures  based on our evaluation as of the
     Evaluation Date;


5.   The registrant's  other certifying  officer and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):


a)   All  significant  deficiencies  in the  design  or  operation  of  internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize and report  financial data and have  identified for the
     registrant's auditors any material weaknesses in internal controls; and


b)   Any fraud,  whether or not  material,  that  involves  management  or other
     employees  who  have  a  significant  role  in  the  registrant's  internal
     controls; and


6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


Date: March 28, 2003

                                    By: /s/ Francis V. Dane
                                       Principal Financial Officer

                                      -32-
<PAGE>




                                 CERTIFICATION


I, Guido DiGregorio, certify that:


1.   I  have  reviewed  this  annual  report  on  Form  10-K  of   Communication
     Intelligence Corporation.


2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report.


3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;


4.   The  registrant's  other  certifying  officer  and  I  am  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


a)   Designed such  disclosure  controls and  procedures to ensure that material
     information   relating  to  the  registrant,   including  its  consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the  period  in which  this  annual  report  is being
     prepared;


b)   Evaluated the  effectiveness  of the registrant's  disclosure  controls and
     procedures  as of a date  within 90 days prior to the  filing  date of this
     annual report (the "Evaluation Date"); and


c)   Presented in this annual report our conclusions  about the effectiveness of
     the disclosure  controls and  procedures  based on our evaluation as of the
     Evaluation Date.


5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):


a)   All  significant  deficiencies  in the  design  or  operation  of  internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize and report  financial data and have  identified for the
     registrant's auditors any material weaknesses in internal controls; and


b)   Any fraud,  whether or not  material,  that  involves  management  or other
     employees  who  have  a  significant  role  in  the  registrant's  internal
     controls; and


6.   The  registrant's  other  certifying  officer and I have  indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


Date: March 28, 2003

                             By: /s/ Guido DiGregorio
                                 Chairman
                                 Chief Executive Officer

                                      -33-
<PAGE>



                           Independent Auditors Report

Board of Directors and Stockholders of
Communication Intelligence Corporation
Redwood Shores, California


We have audited the  accompanying  consolidated  balance sheets of Communication
Intelligence Corporation and its subsidiary as of December 31, 2002 and 2001 and
the related  consolidated  statements of  operations,  changes in  stockholders'
equity (deficit),  cash flows and financial  statement  schedule for each of the
three  years in the  period  ended  December  31,  2002,  as listed in the index
appearing under Item 15(a)(1) and (2) of this Annual Report on Form 10-K.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We conducted our audit in accordance with generally  accepted auditing standards
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis, evidence supporting the amounts and the disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion the consolidated  financial  statements and financial  statements
schedule  listed in the index  appearing  under  Item  15(a)(1)  and (2) of this
Annual  Report  on Form 10-K  present  fairly,  in all  material  respects,  the
financial   position  of   Communication   Intelligence   Corporation   and  its
subsidiaries  ("the  Company") as of December 31, 2002, and 2001 and the results
of their  operations  and their  cash  flows for each of the three  years in the
period  ended  December 31,  2002,  in  conformity  with  accounting  principles
generally accepted in the United States of America.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in  Note 1 to the
financial  statements,  the Company has incurred  losses from operations and has
accumulated  losses of $79,819,000.  This factor raises  substantial doubt about
its  ability to  continue as a going  concern.  Management's  plans in regard to
these  matters are also  described in Note 1. The  financial  statements  do not
include any adjustments that might result from the outcome of this uncertainty.




STONEFIELD JOSEPHSON INC.
Certified Public Accountants

San Francisco, California
February 14, 2003


                                      F-1
<PAGE>


                     Communication Intelligence Corporation
                           Consolidated Balance Sheets
                    (In thousands, except par value amounts)


                                                            December 31,
                                                  ------------------------------
                                                       2002              2001
                                                  ------------------------------

Assets
Current assets:
  Cash and cash equivalents.....................  $      711        $    2,588
  Accounts receivable, net of allowances of
  $243 and $278 at December 31, 2002
  and 2001, respectively........................         477             1,043
  Inventories...................................         113               129
  Prepaid expenses and other current assets.....         244               139
                                                 -------------     -------------


        Total current assets....................       1,545             3,899

Property and equipment, net.....................         159               161
Patents and trademarks..........................       5,421             5,799
Other assets....................................          43               213
                                                 -------------     -------------


        Total assets...........................   $    7,168        $   10,072
                                                 =============     =============




Liabilities and Stockholders' Equity
Current liabilities:
  Accounts payable..............................  $      160        $      206
  Short-term debt...............................           -               181
  Accrued compensation..........................         250               208
  Other accrued liabilities.....................         527               199
  Deferred revenue..............................         165                88
                                                ------------       ------------
        Total current liabilities...............       1,102               882


Long-term debt - related party...................      3,000             3,000

Minority interest................................        132               130

Commitments

Stockholders' equity:
  Common stock, $.01 par value; 125,000
  shares authorized; 92,481 and
  90,912 shares issued and outstanding
  at December 31, 2002 and
  2001,respectively..............................        915               909
  Additional paid-in capital.....................     82,025            81,605
  Accumulated deficit............................    (79,819)          (76,258)
  Accumulated other comprehensive loss...........       (187)             (196)
                                                  ------------     -------------
Total stockholders' equity......................       2,934             6,060
                                                  ------------     -------------

   Total liabilities and stockholders' equity.... $    7,168        $   10,072
                                                  ============   ===============


   The accompanying notes form an integral part of these Financial Statements


                                      F-2
<PAGE>


                     Communication Intelligence Corporation
                      Consolidated Statements of Operations
                    (In thousands, except per share amounts)

                                                 Years ended December 31,
                                        ----------------------------------------
                                             2002           2001          2000
                                        ----------------------------------------

Revenues:
  Online.............................   $      351     $      913    $    1,198
  Corporate..........................        1,667          2,958         3,326
   Nonrecurring maintenance
   fees - M10 (Previously PenOp).....            -            352           877
  China..............................        1,254          1,724         1,911
                                       -------------- --------------  ----------
                                             3,272          5,947         7,312
                                       -------------- --------------  ----------
Operating costs and expenses:
   Cost of sales:
     Online..........................         259            805         1,087
     Corporate.......................          96            290           416
     China...........................         802          1,145         1,393
   Research and development..........       1,485          1,808         1,603
   Sales and marketing...............       1,543          2,054         2,239
   General and administrative........       2,424          2,791         2,181
                                       ------------- -------------  ------------
                                            6,609          8,893         8,919
                                       ------------- -------------  ------------

Loss from operations.................      (3,337)        (2,946)       (1,607)

Interest income and other
 income (expense), net...............         (17)            16            76
Interest expense.....................        (205)          (282)         (266)
Minority interest....................          (2)            (3)           (2)
                                       ------------- -------------  ------------

Net loss.............................  $   (3,561)    $   (3,215)   $   (1,799)
                                       ============= ============== ============

Basic and diluted loss per share.....  $    (0.04)    $    (0.04)   $    (0.02)
                                       ============= ============== ============

Weighted average shares..............      91,298         90,571        85,324
                                       ============= ============== ============


   The accompanying notes form an integral part of these Financial Statements

                                      F-3
<PAGE>


                     Communication Intelligence Corporation
      Consolidated Statements of Changes in Stockholders' Equity (Deficit)
                                 (In thousands)


                                                            Accumulated
                                     Additional                Other
                             Common    Paid-In  Accumulated Comprehensive
                              Stock    Capital    Deficit      Loss       Total

Balances as of December 31,
  2000....................... $  897  $ 80,656   $(73,043)  $  (203)   $  8,307
                              --------------------------------------------------
Exercise of options for
  1,176 shares of Common      $   11    $  892     $    -    $    -     $   903
  Stock......................
Issuance of 68 shares of
  Common Stock in exchange         1        57          -         -          58
  for services...............
Foreign currency translation
  adjustment.................      -         -          -         7           7
Net loss.....................                       (3,215)              (3,215)
                              --------------------------------------------------
Balances as of December 31,
 2001.......................  $  909  $ 81,605    $(76,258)  $ (196)   $  6,060
                              --------------------------------------------------
Exercise of options for 420
  shares of Common Stock..... $    6  $    420    $          $         $    426
Foreign currency translation
  adjustment.................                                     9           9

Net loss.....................                      (3,561)               (3,561)
                              --------------------------------------------------
Balances as of December 31,
  2002....................... $  915  $ 82,025   $(79,819)   $  (187)  $  2,934
                              --------------------------------------------------



     Total shares outstanding as of December 31, 2002 was 91,481; as of December
31,2001was 90,912, and as of December 31, 2000 was 89,668.


   The accompanying notes form an integral part of these Financial Statements

                                      F-4
<PAGE>


                     Communication Intelligence Corporation
                      Consolidated Statements of Cash Flows
                                 (In thousands)

                                                Years ended December 31,
                                         ---------------------------------------
                                             2002          2001          2000
                                         ---------------------------------------

Cash flows from operating activities
Net loss................................. $  (3,561)    $  (3,215)    $  (1,799)
Adjustments to reconcile net loss
 to net cash used in operating
  activities:
  Depreciation and amortization..........       467           687           328
  Equity securities issued for services..         -            58             -
  Non-cash compensation..................         -            46            89
  (Gain) loss on disposal of property
  and equipment..........................         6             -             -
  Changes in operating assets and liabilities
    Accounts receivable, net.............       566           717          (185)
    Inventories..........................        16            42           (90)
    Prepaid expenses and other current
     assets..............................      (105)          135           (95)
    Other assets.........................       156           (14)           48
    Accounts payable.....................       (46)         (469)          390
    Accrued compensation.................        42           (55)           (3)
    Other accrued liabilities............       295          (117)         (176)
    Deferred revenue.....................        77            26            26
                                          ------------ -----------   -----------

Net cash used in operating activities....    (2,087)       (2,159)       (1,467)
                                          ------------ -----------   -----------
Cash flows from investing activities
Acquisition of property and equipment....       (30)          (58)         (634)
                                          ------------ -----------   -----------

Net cash used in investing activities....       (30)          (58)         (634)
                                          ------------ ------------  -----------
Cash flows from financing activities
Proceeds from issuance of short-term
 debt....................................         -           181           120
Proceeds from issuance of long-term
 debt - related party....................         -         3,000             -
Principal payments on short-term debt....      (181)       (1,620)          (60)
Principal payments on capital
lease obligations........................        (5)           (8)          ( 4)
Proceeds from exercise of warrants.......         -             -           437
Proceeds from exercise of stock options..       426           903         1,583
                                           ----------- -------------  ----------
Net cash provided by (used in)
 financing activities...................        240         2,456         2,076
                                           ----------- -------------  ----------
Net increase (decrease) in cash and
 cash equivalents......................      (1,877)          239           (25)
Cash and cash equivalents at
beginning of year......................       2,588         2,349         2,374
                                          ------------- ------------ -----------
Cash and cash equivalents at end of year. $     711     $   2,588     $   2,349
                                          ============= ============ ===========


   The accompanying notes form an integral part of these Financial Statements

                                      F-5
<PAGE>


                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of  Business,  Basis of  Presentation  and  Summary  of  Significant
     Accounting Policies

The Company

     Communication  Intelligence  Corporation  (the "Company" or "CIC") develops
and markets natural input and biometric  electronic signature solutions aimed at
the emerging markets such as, e-commerce, wireless Internet/information devices,
and corporate  security.  These emerging  markets for CIC's products include all
areas of personal computing, as well as electronic commerce and communications.

     The  Company's  research  and  development  activities  have  given rise to
numerous  technologies  and  products.   The  Company's  core  technologies  are
classified  into  two  broad  categories:   "natural  input   technologies"  and
"transaction  and  communication  enabling  technologies".  CIC's  natural input
technologies are designed to allow users to interact with a computer or handheld
device through the use of an electronic pen or "stylus".  Such products  include
the  Company's   multi-lingual   Handwriter(R)   Recognition   System,  and  its
Handwriter(R)  for  Windows(R)  family  of  desktop  computing  products.  CIC's
transaction  and  communication   enabling  technologies  provide  a  means  for
protecting  electronic  transactions and discretionary  communications.  CIC has
developed  products  for dynamic  signature  verification,  electronic  ink data
compression  and encryption and a suite of  development  tools and  applications
which the Company believes could increase the functionality of its core products
and facilitate their integration into original equipment  manufacturers' ("OEM")
hardware products and computer systems and networks.

     Through its 90% owned joint  venture in China (the  "Joint  Venture"),  the
Company provides system integration  services and markets its pen-based business
computer  systems  to  Chinese  businesses,  government  users and  other  joint
ventures.

     For the  five-year  period ended  December 31, 2002,  the Company  incurred
aggregate  losses of $13.9 and, at December 31, 2002, the Company's  accumulated
deficit was  approximately  $79.8. The Company has primarily funded these losses
through the sale of debt and equity securities.

Going Concern

     The accompanying  financial statements have been prepared assuming that the
Company will  continue as a going  concern.  The Company has suffered  recurring
losses  from  operations  that raise a doubt  about its ability to continue as a
going concern. The Company is in the process of filing a registration  statement
with the  Securities  and Exchange  Commission  in order to obtain  funding from
equity  financing  (See Note 13).  However,  there can be no assurance  that the
Company will have adequate capital resources to fund planned  operations or that
any  additional  funds will be  available  to the  Company  when  needed,  or if
available,  will be available on favorable  terms or in amounts  required by the
Company.  If the Company is unable to obtain adequate capital  resources to fund
operations,  it may be required to delay, scale back or eliminate some or all of
its  operations,  which may have a  material  adverse  effect  on the  Company's
business,  results of operations and ability to operate as a going concern.  The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.

Basis of Consolidation

     The  accompanying   consolidated   financial  statements  are  prepared  in
accordance with generally accepted accounting principles in the United States of
America,  and include the accounts of CIC and its 90% owned Joint Venture in the
People's  Republic of China. All  inter-company  accounts and transactions  have
been eliminated.  All amounts shown in the accompanying  financial statement are
in thousands of dollars except per share amounts.

Use of Estimates

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that affect the  reported  amounts of assets and  liabilities,  and
disclosure of contingent  assets and  liabilities,  at the date of the financial
statements,  as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.

                                      F-6
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of  Business,  Basis of  Presentation  and  Summary  of  Significant
     Accounting Policies (continued)

Fair Value of Financial Instruments

     The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, and short-term debt, approximate fair
value due to their short maturities.

Cash and Cash Equivalents

     The Company  considers all highly liquid  investments  with maturity at the
date of purchase of three months or less to be cash equivalents.

     Short-term  investments  are  classified as  "available-for-sale."  For all
periods presented,  cost of investments approximated fair market value. The cost
of securities sold is based on the specific  identification  method. The Company
had no short-term investments as of December 31, 2002 or 2001.

     The Company's cash and cash  equivalents,  at December 31, consisted of the
following:

                                                2002        2001
                                            ----------- ------------

    Cash in bank..........................    $    260    $  1,621
    Commercial paper......................           -          26
    Money markets.........................         451         941
                                            ----------- ------------


  Cash and cash equivalents...............    $    711    $  2,588
                                            =========== ============




Concentrations of Credit Risk

     Financial  instruments that potentially  subject the Company to significant
concentrations  of credit risk  consist  primarily  of cash,  cash  equivalents,
restricted cash,  short-term  investments and accounts  receivable.  The Company
maintains its cash,  cash  equivalents and short-term  investments  with various
financial institutions.  This diversification of risk is consistent with Company
policy to maintain liquidity, and mitigate against risk of loss as to principal.
Although such amounts may exceed the F. D. I. C. limits,  the Company limits the
amount of credit  exposure with any one financial  institution and believes that
no significant concentration of credit risk exists with respect to cash and cash
equivalents.

     At  December 31,  2002,  the Joint Venture had  approximately  $271 in cash
accounts held by a financial  institution in the People's Republic of China. The
Joint Venture deposits are not covered by any federal deposit  insurance program
that is comparable to the programs applicable to U.S. deposits.

     To date,  accounts  receivable have been derived  principally from revenues
earned from end users,  manufacturers,  retailers and  distributors  of computer
products in North  America,  Europe and the Pacific  Rim.  The Company  performs
periodic credit evaluations of its customers,  and does not require  collateral.
The Company maintains reserves for potential credit losses;  historically,  such
losses have been insignificant and within management's expectations.

     The allowance for doubtful accounts is based on the Company's assessment of
the   collectibility   of  specific  customer  accounts  and  an  assessment  of
international,  political and economic risk as well as the aging of the accounts
receivable.  If  there  is a  change  in  actual  defaults  from  the  Company's
historical experience,  the Company's estimates of recoverability of amounts due
it could be affected and the Company will adjust the allowance accordingly.


                                      F-7
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

Inventories

     Inventories  are  stated  at the  lower  of  cost  or  market,  cost  being
determined  using the  first-in  first-out  ("FIFO")  method.  Cost  principally
includes direct materials. At December 31,  2002 and 2001, inventories consisted
of finished goods.


1.   Nature of  Business,  Basis of  Presentation  and  Summary  of  Significant
     Accounting Policies (continued)

Property and Equipment, Net

     Property and equipment are stated at cost.  Depreciation  is computed using
the straight-line  method over the estimated useful lives of the related assets,
ranging from three to five years.  Leasehold  improvements  are  amortized  over
their estimated  useful lives,  not to exceed the term of the related lease. The
cost of additions and improvements is capitalized, while maintenance and repairs
are charged to expense as incurred.  Depreciation expense was $75, $163 and $185
for the year ended December 31, 2002, 2001 and 2000,  respectively.  The Chinese
joint venture disposed of certain assets and accumulated  depreciation amounting
to $30 in 2002.


     Property and equipment, net at December 31, consists of the following:

                                                           2002         2001
                                                        -----------   ----------

Machinery and equipment.................................  $1,273       $1,224
Office furniture and fixtures...........................     432          448
Leasehold improvements..................................      84           84
Purchased software......................................     216          206
                                                        -----------   ----------


                                                           2,005        1,962
Less accumulated depreciation and amortization..........  (1,846)      (1,801)
                                                        -----------   ----------
                                                         $   159      $   161
                                                        ===========   ==========


     Included in property and equipment,  as of December 31,  2002 and 2001, are
$82 and $42, respectively,  of assets acquired under capital leases. Accumulated
depreciation  on such assets  totaled $44 and $38 at December 31, 2002 and 2001,
respectively.

Patents

     On October 6, 2000,  the Company  acquired  certain assets of PenOp Limited
("PenOp") and its subsidiary PenOp Inc. pursuant to an asset purchase  agreement
dated as of  September  29,  2000.  Patents are stated at cost less  accumulated
amortization which in Management's  opinion represents fair value.  Amortization
is  computed  using the  straight-line  method over the  estimated  lives of the
related assets,  ranging from five to seventeen years.  Amortization expense was
$378,  $440 and $43 for the  years  ended  December  31,  2002,  2001 and  2000,
respectively.

The nature of the underlying technology of each material patent is as follows:

o    Patent  numbers  5544255,  5647017,  5818955  and  6064751  involve (a) the
     electronic  capture of a  handwritten  signature  utilizing  an  electronic
     tablet device on a standard computer system within an electronic  document,
     (b) the verification of the identity of the person providing the electronic
     signature through  comparison of stored signature  measurements,  and (c) a
     system to determine whether an electronic  document has been modified after
     signature

                                      F-8
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of  Business,  Basis of  Presentation  and  Summary  of  Significant
     Accounting Policies (continued)

Patents (continued)

o    Patent  number  6091835  involves all of the foregoing and the recording of
     the  electronic  execution of a document  regardless  of whether  execution
     occurs through a handwritten signature, voice pattern, fingerprint or other
     identifiable means.

     Patents, net at December 31, consists of the following:

                             Expiration     Life            2002         2001
                                                      ------------ ------------

Patent (Various).............  Various         5       $       9    $       9
Patent (Various).............  Various         7             476          476
5544255......................   2013          13              93           93
5647017......................   2014          14             187          187
5818955......................   2015          15             373          373
6064751......................   2017          17           1,213        1,213
6091835......................   2017          17           4,394        4,394
                                                      ------------ ------------
                                                           6,745        6,745
Less accumulated amortization..                           (1,324)        (946)
                                                      ------------ ------------
                                                       $   5,421    $   5,799
                                                      ============ ============
     Amortization  expense for the years ending December 31, 2003,  2004,  2005,
2006 and 2007 are estimated to be $379, $379, $379, $379 and $379, respectively.

     The  patents  identified,  as  "various"  are  technically  narrow or dated
patents that the company believes are not material. The useful lives assigned to
the patents are based upon the following assumptions and conclusions:

o    The estimated  cash flow from products  based upon each patent are expected
     to exceed the value assigned to each patent

o    There are no  legal,  regulatory  or  contractual  provisions  known to the
     company  that  limits  the  useful  life of each  patent  to less  than the
     assigned useful life



o    The company  does not foresee any effects of  obsolescence  or  significant
     competitive  pressure  on  its  current  or  future  products,  anticipates
     increasing  demand for  products  utilizing  the patented  technology,  and
     believes  that the current  markets for its products  based on the patented
     technology will remain constant or will grow over the useful lives assigned
     to the patents  because of a legal,  regulatory  and  business  environment
     encouraging the use of electronic signatures.

     The Company performs  intangible  asset impairment  analyses on a quarterly
basis in  accordance  with the guidance in  Statement  of  Financial  Accounting
Standard No. 142,  Goodwill  and Other  Intangible  Assets  ("SFAS No. 142") and
Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal
of Long Lived Assets ("SFAS No. 144").  The Company uses SFAS 144 in response to
changes in industry and market conditions that affects its patents,  the Company
then determine if an impairment of its assets has occurred. The Company reassess
the lives of its patents and test for impairment quarterly in order to determine
whether  the book value of each patent  exceeds  the fair value of each  patent.
Fair value is determined by estimating  future cash flows from the products that
are and will be protected by the patents and considering the additional  factors
listed in Critical Accounting Policies in Item 7 of this Form 10-K.

                                      F-9
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of  Business,  Basis of  Presentation  and  Summary  of  Significant
     Accounting Policies (continued)

Long-Lived Assets

     The Company evaluates the  recoverability of its long-lived assets whenever
circumstances  or events  indicate  such assets might be  impaired.  The Company
would  recognize an  impairment  reserve in the event the net book value of such
assets exceeded the future  undiscounted cash flows attributable to such assets.
No such reserves have been recorded in the three years ended December 31, 2002.

Software Development Costs

     Software Development Costs. Software development costs are accounted for in
accordance with Statement of Financial  Accounting Standards No. 86, "Accounting
for the Costs of Computer  Software to be Sold,  Leased or  Otherwise  Marketed"
("SFAS 86"). Under SFAS 86,  capitalization of software development costs begins
upon the establishment of technological  feasibility,  subject to net realizable
value  considerations.  The costs capitalized  include the coding and testing of
the product after the  technological  feasibility has been  established and ends
upon the release of the product.  The capitalized costs are amortized to cost of
sales on a straight-line basis over the estimated life of the product, generally
three  years.  As of  December  31,  2002,  2001,  and  2000,  such  costs  were
insignificant.

Stock-Based Compensation

     Effective  January 1,  1996,  the Company  adopted  Statement  of Financial
Accounting   Standards  No. 123,   "Accounting  for  Stock-Based   Compensation"
("SFAS 123").  The Company has  elected to continue to use the  intrinsic  value
based method of Accounting  Principles  Board Opinion  No. 25,  as allowed under
SFAS 123,  to account  for its  employee  stock-based  compensation  plans.  The
Company complies with the disclosure provisions of SFAS 123.

Revenue Recognition

     Revenue is recognized when earned in accordance with applicable  accounting
standards,  including  AICPA  Statement of Position  ("SOP") No. 97-2,  Software
Revenue Recognition,  as amended, Staff Accounting Bulletins 101 ("SAB 101") and
the interpretive  guidance issued by the Securities and Exchange  Commission and
EITF issue 00-21 of the AICPA Emerging Issues Task Force. The Company  recognize
revenues from sales of software products upon shipment, provided that persuasive
evidence of an arrangement exists,  collection is determined to be probable, all
non-recurring  engineering  work  necessary to enable the  Company's  product to
function within the customer's  application has been completed and the Company's
product has been  delivered  according to  specifications.  Revenue from service
subscriptions is recognized as costs are incurred or over the service period.

     Software  license   agreements  may  contain  multiple  elements  including
upgrades and enhancements, products deliverable on a when and if available basis
and  post  contract  support.   Revenue  from  software  license  agreements  is
recognized upon delivery of the software provided that persuasive evidence of an
arrangement   exists,   and  collection  is  determined  to  be  probable,   all
nonrecurring  engineering  work  necessary to enable the  Company's  products to
function  within the customer's  application  has been completed and the Company
has  delivered  its product  according to  specifications.  Deferred  revenue is
recorded for upgrades, enhancements and post contract support, which is paid for
in addition to license fees, and is recognized as costs are incurred or over the
support  period.  Vendor  specific  objective  evidence  of the fair  value  for
multiple element software license  agreements is determined by the price charged
for the same element when sold separately or the price  determined by management
having the relevant  authority when an element is not yet sold  separately.  The
price established by management for the element not yet sold separately will not
change prior to separate introduction of that element into the marketplace.

     Revenue from system integration  activities,  which represents the sale and
installation of third party computer  equipment and limited  related  consulting
services which requires little modification or customization to the software, is
recognized  upon  installation  as projects  are short term in nature,  provided
persuasive evidence of an arrangement

                                      F-10
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of  Business,  Basis of  Presentation  and  Summary  of  Significant
     Accounting Policies (continued)

Revenue Recognition (continued)

exists, the collection of the resulting receivable is probable and the system is
functioning   according  to  specifications.   Service   subscription   revenues
associated  with the system  integration  activities are recognized as costs are
incurred or over the service period.

     The  online/retail  sales category includes sales of software made directly
from the Company's website,  which are downloaded by the end user. Revenues from
software  product  sales  through  the  Company's  website are  recognized  upon
shipment  (download).  The Company  provides for estimated  sales returns at the
time of shipment.

     The  online/retail  sales category includes sales of software made directly
from the Company's  website,  which are downloaded either directly by a reseller
or to a customer of such  reseller.  In both  cases,  the  reseller  reports the
number of units sold each month by submitting  payment and a royalty report. The
reseller  receives a  percentage  of each sale.  The Company  allows the on-line
resellers a right of return or right of offset.  The number of units reported is
net of any product returns from prior months. The Company recognizes revenues on
the net amount reported by the resellers each month on a cash basis. The Company
has a  limited  number of  resellers  for its  software  available  through  the
Company's website.

     The  online/retail  sales  category also includes sales made through retail
establishments under the Elibrium agreement. Revenue from software product sales
through retail are recognized upon  notification  from Elibrium of the number of
units sold  through  Elibrium's  retail  customers  provided  collection  of the
resulting receivable is reasonably assured.

Major Customers

     Handwriting  Recognition Segment.  Historically,  the Company's handwriting
recognition  segment  revenues  have  been  derived  from a  limited  number  of
customers. One customer, Nationwide Building Society, accounted for 11% of total
segment  revenues  for the year ended  December  31,  2002.  One  customer,  The
Prudential  Insurance  Company of  America  accounted  for 16% of total  segment
revenues for the year ended 2001. One customer,  Ericsson Mobile  Communications
AB, accounted for 16% of total segment revenues for the year ended 2000.

     Systems Integration Segment.  One customer,  Fujitsu Ltd. accounted for 30%
of total system  integration  revenue for the year ended December 31, 2002. This
same customer accounted for 16%, and 16% of total segment revenues in the twelve
months ended December 31, 2001and 2000, respectively.

Research and Development

     Research and development costs are charged to expense as incurred.

Advertising

     The Company expenses advertising costs as incurred. Advertising expense for
the year  ended  December  31,  2002,  2001,  and 2000 was $112,  $203 and $399,
respectively.

Net Loss Per Share

     The Company calculates earnings per share under the provisions of Statement
of Financial  Accounting  Standards No. 128,  "Earnings Per Share" ("SFAS 128").
SFAS 128  requires the  disclosure  of both basic  earnings per share,  which is
based on the weighted average number of shares outstanding, and diluted earnings
per share, which is based

                                      F-11
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of  Business,  Basis of  Presentation  and  Summary  of  Significant
     Accounting Policies (continued)

Net Loss Per Share (continued)

on  the  weighted  average  number  of  shares  and  dilutive  potential  shares
outstanding.  For the year ended  December  31,  2002,  2001 and 2000  potential
equivalent  shares excluded from the calculation of diluted  earnings per share,
as their effect is not dilutive, include stock options of 6,452, 7,027 and 8,145
of equivalent shares.  There were no warrants  outstanding at December 31, 2002.
Warrants  excluded from the  calculation  in 2001 and 2000 were 237,  equivalent
shares, respectively.

Foreign Currency Translation

     The Company considers the functional  currency of the Chinese Joint Venture
to be the local currency and, accordingly, gains and losses from the translation
of the local foreign currency  financial  statements are included as a component
of  "accumulated  other  comprehensive  loss" in the  accompanying  consolidated
balance sheets. Foreign currency assets and liabilities are translated into U.S.
dollars at the  end-of-period  exchange  rates except for  long-term  assets and
liabilities,  which are translated at historical  exchange  rates.  Revenues and
expenses are  translated  at the average  exchange  rates in effect  during each
period  except for those  expenses  related to balance  sheet  amounts which are
translated at historical exchange rates.

     Net foreign currency transaction gains and losses are included in "interest
income  and  other  income  (expense),  net"  in the  accompanying  consolidated
statements of operations.  Foreign currency  transaction gains in 2002 ,2001 and
2000 were insignificant.

Income Taxes

     Deferred tax assets and  liabilities  are  recognized  for the expected tax
consequences  of  temporary  differences  between  the tax bases of  assets  and
liabilities and their financial  statement reported amounts and for tax loss and
credit  carryforwards.  A valuation  allowance is provided  against deferred tax
assets when it is  determined to be more likely than not that the asset will not
be realized.

Acquisition of Assets From PenOp

     On  October  6,  2000,  a  wholly-owned  subsidiary  of the  Company,  (the
"Buyer"),  acquired certain assets of PenOp Limited ("PenOp") and its subsidiary
PenOp  Inc.,  (collectively,  the  "Sellers")  pursuant  to  an  asset  purchase
agreement dated as of September 29, 2000, by and among Buyer and the Sellers for
4.7 million  shares of common  stock of the  Company  (the  "Acquisition").  The
Company ascribed a value of $5,728 to the assets which will be charged to income
over the estimated lives of the assets, five to seventeen years.

     Pursuant  to the  asset  purchase  agreement,  the  Company  agreed  to use
reasonable efforts to file a Registration  Statement under the Securities Act of
1933,  as amended (the "Act"),  covering the sale of the  Transaction  Shares no
later than thirty (30) days from closing and to use  reasonable  efforts to have
the Registration Statement declared effective as soon as practicable thereafter.
The registration statement was declared effective on November 22, 2000.

     Subsequent  to the  closing,  an officer  and  Chairman of the Board of the
Company at that time, and his designees,  purchased in a private  transaction an
aggregate of 1,713,728  shares of common stock received by Sellers in connection
with the Acquisition for $3.3 million.

                                      F-12
<PAGE>

                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of  Business,  Basis of  Presentation  and  Summary  of  Significant
     Accounting Policies (continued)

Equity Line of Credit Agreement

     In July 2002, the Company negotiated a Line of Credit agreement expiring in
two years from the effective  date of the related  registration  statement  with
Cornell Capital Partners, LP. The Company may periodically issue and sell shares
of its common stock for a total  purchase  price of $15 million,  subject to the
number of shares  available for issuance and the purchase  price of such shares.
As of December 31, 2002 there was approximately 24 million shares available.  If
the  Company  request  an  advance  under the Line of  Credit,  Cornell  Capital
Partners,  L.P. will purchase  shares of common stock of the Company for 100% of
the  "Market  Price" of its stock (less a 6.5%  advance  fee).  Market  Price is
defined as the lowest volume  weighted  average  price of the  Company's  common
stock as reported by  Bloomberg,  LP,  calculated  over four of the five trading
days after the Company request an advance. The maximum amount of each advance is
equal to $1 million in any 30-day  period.  In  addition,  in no event shall the
number of shares issuable to Cornell Capital  Partners,  LP cause Cornell to own
in excess of 9.9% of the then outstanding  shares of the Company's common stock.
On each advance date, the Company must pay to Cornell Capital Partners,  L.P. an
Advance fee equal to 6.5% of the amount of each advance.  A closing will be held
six (6) trading days after such written  notice,  at which time the Company will
deliver shares of common stock and Cornell Capital  Partners,  L.P. will pay the
advance amount.  Cornell Capital Partners,  L.P. cannot transfer its interest in
the Equity  Line of Credit to any other  person  and  cannot  engage in sales of
shares of common stock acquired under the Line of Credit.

Recent Pronouncements

     In October 2001,  the FASB recently  issued SFAS No. 143,  "Accounting  for
Asset Retirement Obligations," which requires companies to record the fair value
of a liability for asset retirement  obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction,  and  development or through the normal  operation of a long-lived
asset. When a liability is initially recorded,  the company would capitalize the
cost,  thereby  increasing  the  carrying  amount  of  the  related  asset.  The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value.  Upon  settlement of
the liability,  the obligation is settled at its recorded  amount or the company
incurs a gain or loss.  The  statement is effective  for fiscal years  beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.

     In  October  2001,  the FASB  issued  SFAS  No.  144,  "Accounting  for the
Impairment  or Disposal of  Long-Lived  Assets".  Statement  144  addresses  the
accounting  and reporting for the  impairment or disposal of long-lived  assets.
The statement  provides a single  accounting  model for long-lived  assets to be
disposed  of.  New  criteria  must be met to  classify  the  asset  as an  asset
held-for-sale.  This  statement  also  focuses  on  reporting  the  effects of a
disposal of a segment of a business.  This  statement  is  effective  for fiscal
years beginning  after December 15, 2001. The adoption of FASB 144,  "Accounting
for the  Impairment  or Disposal of  Long-Lived  Assets" did not have a material
impact to the Company's financial position or results of operations.

     In April 2002,  the FASB issued  Statement  No.  145,  "Rescission  of FASB
Statements No. 4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and
Losses from  Extinguishment  of Debt", and an amendment of that Statement,  FASB
Statement  No.  64,  "Extinguishments  of  Debt  Made  to  Satisfy  Sinking-Fund
Requirements"  and FASB Statement No. 44,  "Accounting for Intangible  Assets of
Motor Carriers".  This Statement  amends FASB Statement No. 13,  "Accounting for
Leases",  to eliminate an  inconsistency  between the  required  accounting  for
sale-leaseback  transactions  and the  required  accounting  for  certain  lease
modifications  that have  economic  effects  that are similar to  sale-leaseback
transactions. The Company does not expect the adoption to have a material impact
to the Company's financial position or results of operations.

     In June  2002,  the  FASB  issued  SFAS  No.  146,  "Accounting  for  Costs
Associated with Exit or Disposal Activities". This statement addresses financial
accounting and reporting for costs  associated with exit or disposal  activities
and nullifies  Emerging  Issues Task Force ("EITF")  Issue No. 94-3,  "Liability
Recognition for Certain Employee

                                      F-13
<PAGE>

                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

1.   Nature of  Business,  Basis of  Presentation  and  Summary  of  Significant
     Accounting Policies (continued)

Recent Pronouncements

Termination  Benefits  and Other  Costs to Exit an Activity  (including  Certain
Costs Incurred in a Restructuring)".  SFAS No. 146 requires that a liability for
a cost  associated  with an exit or  disposal  activity is  recognized  when the
liability  is  incurred.  EITF 94-3  allowed  for an exit cost  liability  to be
recognized at the date of an entity's  commitment to an exit plan. SFAS 146 also
requires that  liabilities  recorded in connection  with exit plans be initially
measured at fair value.  The  provisions  of SFAS 146 are  effective for exit or
disposal  activities  that are  initiated  after  December 31, 2002,  with early
adoption encouraged.

     In December  2002,  the FASB issued  Statement  No.  148,  "Accounting  for
Stock-Based Compensation-Transition and Disclosure", which amends FASB Statement
No. 123, Accounting for Stock-Based Compensation, to provide alternative methods
of  transition  for a  voluntary  change  to the  fair  value  based  method  of
accounting for stock-based employee  compensation.  In addition,  this Statement
amends  the  disclosure  requirements  of  Statement  123 to  require  prominent
disclosures in both annual and interim financial  statements about the method of
accounting for stock-based  employee  compensation  and the effect of the method
used  on  reported  results.  The  transition  guidance  and  annual  disclosure
provisions of Statement 148 are effective for fiscal years ending after December
15, 2002,  with earlier  application  permitted  in certain  circumstances.  The
interim  disclosure  provisions are effective for financial  reports  containing
financial  statements for interim periods beginning after December 15, 2002. The
adoption  of this  statement  did not have a  material  impact on the  Company's
financial  position or results of  operations  as the Company has not elected to
change to the fair value based method of  accounting  for  stock-based  employee
compensation.

2. Chinese Joint Venture

     The Company  currently  owns 90% of a joint venture with the Jiangsu Hongtu
Electronics  Group, a provincial  agency of the People's  Republic of China (the
"Agency"). In June 1998, the registered capital of the Joint Venture was reduced
from $10,000 to $2,550.  As of December 31, 2002, the Company had contributed an
aggregate  of  $1,800  in  cash  to the  Joint  Venture  and  provided  it  with
non-exclusive  licenses to technologies and certain  distribution rights and the
Agency had  contributed  certain  land use rights.  Following  the  reduction in
registered  capital of the Joint Venture,  neither the Company nor the Agency is
required  to make  further  contributions  to the  Joint  Venture.  Prior to the
reduction in the amount of registered capital,  the Joint Venture was subject to
the annual licensing requirements of the Chinese government. Concurrent with the
reduction in registered  capital,  the Joint Venture's business license has been
renewed through October 18, 2043.

3. Comprehensive Income

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive Income" ("SFAS
130"). The Company adopted SFAS 130 effective January 1, 1998. SFAS 130 requires
that  all  items  recognized   under  accounting   standards  as  components  of
comprehensive earnings be reported in an annual statement that is displayed with
the same prominence as other annual financial statements. SFAS 130 also requires
that an entity classify items as other comprehensive earnings by their nature in
an annual  financialstatement.  For example,  other  comprehensive  earnings may
include foreign  currency  translation  adjustments,  minimum pension  liability
adjustments, and unrealized gains and losses on marketable securities classified
as available-for-sale.

     The  accumulated  other  comprehensive  loss at December  31, 2002 and 2001
consisted of cumulative foreign currency translation adjustments.

                                      F-14
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

4. Short-term Debt

     On August 23, 2001,  the  Company's  90% owned Joint  Venture  borrowed the
aggregate  equivalent of $181,  denominated in Chinese currency,  from a Chinese
bank. The loan bore interest at 5.37% per annum and was due August 23, 2002. The
borrowing did not require the Joint Venture to deposit a  compensating  balance.
In February  2002,  the Joint Venture  repaid $121 and in August 2002,  paid the
remaining equivalent of $60 denominated in Chinese currency.

     Interest expense for the years ending December 31, 2002, 2001, and 2000 was
$205, $281, and $266,  respectively.  Interest  expense  associated with related
party debt was $200,  $274 and $258 for the years ended December 31, 2002,  2001
and 2000, respectively.

5. Related Party Transactions

     On June 19, 2001, the Company consummated a three-year $3 million financing
(the "Loan") with the charitable remainder annuity trust, a trustee of which was
then a director  and officer of the Company (the  "Trust").  The proceeds of the
Loan were used to  refinance  $1,500 of  indebtedness  outstanding  to the Trust
pursuant  to a loan made by the Trust to the  Company  in  October  1999 and for
working  capital  purposes.  The Loan is  secured by a first  priority  security
interest in all of the  Company's  assets as now owned or hereafter  acquired by
the  Company.  The Loan  bears  interest  at the rate of 2% over the prime  rate
publicly  announced  by  Citibank  N. A. from time to time,  which was 6.75% per
annum at December 31, 2002,  and is due June 18, 2004.  The Loan may be pre-paid
by the Company in whole or in part at any time without  penalty,  subject to the
right of the Trust to convert the outstanding  principal amount of the Loan into
shares of common  stock.  Pursuant  to the terms of the Loan,  the Trust has the
option,  at any time prior to  maturity,  to convert  all or any  portion of the
outstanding  principal  amount  of the Loan into  shares of common  stock of the
Company at a conversion price of $2.00 per share, subject to adjustment upon the
occurrence  of certain  events.  If, prior to maturity of the Loan,  the Company
consummates  one or more  financings  providing  $5  million  or  more in  gross
proceeds,  the Company is required to apply 50% of the  proceeds in excess of $5
million to the then outstanding principal amount of the Loan.

     In connection with the Loan, the Company entered into a registration rights
agreement  with the Trust which  obligates  the  Company to file a  registration
statement with the Securities and Exchange  Commission  covering the sale of the
shares of the Company's  common stock issuable upon conversion of the Loan if it
receives a demand by the holder of the Loan to do so, and to use its  reasonable
best efforts to cause such registration statement to become effective.

     In 2002,  $16 and in 2001 and  2000,  $150 in  consulting  fees,  including
office  expenses,  were paid to a party who,  at that time,  was a director  and
Chairman of the Company.

     During the fourth quarter of 2000 the Company engaged in a transaction with
PenOp  (See  Note  1)  to  provide   nonrecurring   maintenance   services  from
pre-existing  PenOp  contracts  in the  aggregate  amount of $1.5  million.  The
Company recorded $877 and $352 in nonrecurring  maintenance  services during the
fourth quarter of 2000 and the first quarter of 2001,  respectively,  (net). The
Company  previously  entered  into  a  separate  transaction,   to  acquire  the
intellectual property rights from PenOp.

6. Stockholders' Equity

Common Stock Options

     The Company  adopted two stock  option plans in 1991 (the 1991 Stock Option
Plan and the 1991  Non-discretionary  Plan,  collectively,  the  "1991  Plans").
Incentive  and  non-qualified  options  under the 1991  Plans may be  granted to
employees, officers, and consultants of the Company. As amended, there are 2,050
shares of Common Stock authorized for issuance under the 1991 Plans. At December
31, 2002, 69 options are available for grant.  In late 1994 the Company  adopted
the 1994 Stock Option Plan (the "1994  Plan").  The 1994 Plan allows  directors,
officers

                                      F-15
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

6. Stockholders' Equity

Common Stock Options (continued)

and  employees to be eligible for grants of incentive  and  non-qualified  stock
options. In May 1997,  the stockholders  approved an increase of 1,000 shares to
the number of shares authorized for issuance under the 1994 Plan. Accordingly, a
total of 6,000 shares of Common Stock are authorized for issuance under the 1994
Plan.  The exercise  prices of options  under the 1994 Plan are  determined by a
committee  of the Board of  Directors,  but, in the case of an  incentive  stock
option, the exercise price may not be less than 100% of the fair market value of
the underlying Common Stock on the date of grant.  Non-qualified options may not
have an  exercise  price  of less  than  85% of the  fair  market  value  of the
underlying  Common  Stock on the date of  grant.  Options  under  the 1994  Plan
generally  vest over four years.  For those  options which vest over four years,
20% of the total options  granted vest on the first  anniversary  of the date of
grant,  and an additional 20%, 20%, and 40% of the total options granted vest on
the second, third, and fourth anniversaries of the date of grant,  respectively.
Options  under  the 1994 Plan are  generally  exercisable  over a period  not to
exceed seven years. At December 31, 2002,  there were 683 options  available for
grant under the 1994 Plan.

     The Company has issued non-plan options to its employees and directors. The
non-plan options vest over four years or prorata quarterly over three years. For
those  non-plan  options which vest over four years,  20% of the total  non-plan
options  granted  vest on the  first  anniversary  of the date of  grant  and an
additional  20%, 20%, and 40% of the total non-plan  options granted vest on the
second,  third,  and fourth  anniversaries  of the date of grant,  respectively.
Non-plan  options are  generally  exercisable  over a period not to exceed seven
years.  As of December 31, 2002,  3,115 non-plan  options were  outstanding  and
exercisable with a weighted average exercise price of $0.84 per share.

     In June 1999,  the Company  adopted and the  shareholders  approved a stock
option plan (the "1999  Plan").  Incentive and  non-qualified  options under the
1999 Plan may be granted to employees, officers, and consultants of the Company.
There are 4,000 shares of Common Stock  authorized  for issuance  under the 1999
Plan. The options have a seven year life and generally vest quarterly over three
years.  At December  31,  2002,  there were 1,715  shares  available  for future
grants.

                                      F-16
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

6. Stockholders' Equity (continued)

Common Stock Options

     Information  with respect to the Company's 1991 Plans the 1994 Plan and the
1999 Plan is summarized below:

                                                Year Ended December 31,
                                         ---------------------------------------
                                                2002                2001
                                         -------------------   -----------------
                                                    Weighted           Weighted
                                                     Average            Average
                                         Shares     Exercise   Shares  Exercise
                                                     Price              Price
                                         ---------------------------------------

Outstanding at beginning of period......   3,442       $1.48     3,257    $1.54
Granted.................................   1,108       $0.60     1,367    $1.21
Exercised...............................    (169)      $0.75      (384)   $0.90
Forfeited...............................  (1,044)      $1.34      (798)   $1.53

                                        ---------             --------
Outstanding at period end...............   3,337       $1.27     3,442    $1.48
                                        =========             ========

Options exercisable at period end.......   2,422       $1.36     2,208    $1.35
                                        =========             ========
Weighted average grant-date fair value of
  options granted during the period.....  $0.60                  $0.98
                                        =========              ========

     The following table summarizes  information about stock options outstanding
under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 2002:

                                                Weighted Average
                                    --------------------------------------------

                                                     Remaining
                                     Options        Contractual
Range of Exercise Prices           Outstanding      Life (Years)  Exercise Price
--------------------------------------------------------------------------------

$0.00 - $0.50..................            294          7.0           $0.29
$0.51 - $2.00..................          2,493          6.3           $0.94
$2.01 - $2.99..................              8          1.1           $2.75
$3.00 - $7.50..................            542          7.3           $3.35
                                  --------------
                                         3,337
                                  ==============

     The following table summarizes  information about stock options exercisable
under the 1991 Plans, the 1994 Plan and the 1999 Plan at December 31, 2002:

                                                                     Weighted
                                                Options              Average
Range of Exercise Prices                      Exercisable         Exercise Price
                                            ------------------------------------
      $0.00 - $0.50.....................          42                $0.36
      $0.51 - $2.00.....................       1,919                $0.91
      $2.01 - $2.99.....................           8                $2.75
      $3.00 - $7.50.....................         453                $3.35
                                            ---------
                                               2,422
                                            =========


                                      F-17
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

6. Stockholders' Equity (continued)

Common Stock Options

     Effective  January 1,  1996,  the Company  adopted  Statement  of Financial
Accounting   Standards  No. 123,   "Accounting  for  Stock-Based   Compensation"
("SFAS 123")  as amended by Financial  Accounting  Standards Board Statement No.
148. The Company has elected to continue to use the intrinsic value based method
of Accounting  Principles  Board Opinion No. 25,  as allowed under SFAS 123,  to
account for its employee  stock-based  compensation  plans. The Company complies
with the disclosure provisions of SFAS 123.

     Had compensation  cost for the Company's option plans been determined based
on the fair value of the  options at the date of grant,  as  prescribed  by SFAS
123,  the  Company's  net loss  available to common  stockholders  and basic and
diluted net loss per share available to stockholders  would have been as follows
for the year ended December 31:

                                             2002          2001          2000
                                        ----------------------------------------

Net loss available to stockholders:
  As reported........................... $ (3,561)     $ (3,215)      $ (1,799)
  Pro forma............................. $ (4,356)     $ (4,743)      $ (3,937)
Basic and diluted net loss per
  share available to stockholders:
  As reported........................... $  (0.04)     $  (0.04)      $  (0.02)
  Pro forma............................. $  (0.05)     $  (0.05)      $  (0.05)

     The fair value of each option grant is estimated on the date of grant using
the  Black-Scholes  option  pricing  model with the following  weighted  average
assumptions used for grants during the applicable  periods:  risk-free  interest
rate of 2.26% for 2002,  4.1% for 2001,  and 4.7% for 2000,  an expected life of
8.6 years for 2002,  6.0 years for 2001,  and 3.5 years for 2000,  respectively;
expected  volatility  of 100%  all  periods  and  dividend  yield  of 0% for all
periods.

     The Company expects to make additional option grants each year. The Company
believes the above pro forma disclosures are not representative of the pro forma
effects on reported results of operations to be expected in future periods.

Warrants

     At December 31, 2002 there were no warrants outstanding. As of December 31,
2002,  6,452 shares of Common Stock were  reserved for issuance upon exercise of
outstanding options.

7. Commitments

Operating Lease Commitments

     The Company  currently leases 9,634 square feet, its principal  facilities,
(the "Principal Offices) in Redwood Shores,  California,  pursuant to a sublease
that  expires in 2006.  In  addition,  the Company  subleased  to third  parties
certain space adjacent to the Principal  Offices  through August 2001. The Joint
Venture leases approximately 1,500 square feet in Nanjing, China. In addition to
monthly rent, the U.S.  facilities are subject to additional rental payments for
utilities  and other costs above the base  amount.  Facilities  rent expense was
approximately  $418,  $443,  and $390 in 2002,  2001,  and  2000,  respectively.
Sublease income was approximately $35, and $104 for the years ended December 31,
2001, and 2000, respectively.

     Future  minimum lease  payments under  noncancelable  operating  leases are
approximately,  $407,  $419,  $430,  and $407 for the years ending  December 31,
2003, 2004, 2005 and 2006, respectively. The Company's rent expense was

                                      F-18
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

7. Commitments

Operating Lease Commitments (continued)

reduced by approximately $35 in 2001 in connection with the subleases  described
above.  Future minimum payments  required under capital leases,  which expire in
2007, were insignificant at December 31, 2002.

8. Income Taxes

     As of  December 31,  2002,  the  Company had  federal  net  operating  loss
carryforwards  available to reduce taxable income through 2012 of  approximately
$54,190.  The  Company  also had  federal  research  and  investment  tax credit
carryforwards of approximately $315 that expire at various dates through 2010.

     Deferred  tax  assets  and  liabilities  at  December 31,  consist  of  the
following:

                                                       2002          2001
                                                  ----------------------------
Deferred tax assets:
Net operating loss carryforwards...............     $ 26,857       $ 21,272
Credit carryforwards...........................          315            315
Deferred income................................           40             13
Other, net.....................................          945            775
                                                  ----------------------------

Total deferred tax assets......................       28,157         22,375
                                                  ----------------------------

Valuation allowance............................      (28,157)       (22,375)
                                                  ----------------------------

Net deferred tax assets........................     $      -       $      -
                                                  ============================

Income tax (benefit) differs from the expected statutory rate as follows:

                                              2002          2001          2000
                                           --------      --------      --------

Expected income tax benefit               $ (1,211)     $  (1,093)    $  (612)
State income tax net of Federal benefit       (214)          (193)       (108)

Loss on write off from foreign investment   (4,357)             -           -
Change in valuation allowance                5,782          1,286         720
                                           ---------    ----------    ----------

Income tax benefit                         $     -      $       -     $     -
                                           ==========   ==========    ==========

     A full  valuation  allowance  has been  established  for the  Company's net
deferred tax assets since the  realization of such assets through the generation
of future taxable income is uncertain.

     Under the Tax Reform Act of 1986, the amounts of, and the benefit from, net
operating  losses and tax credit  carryforwards  may be  impaired  or limited in
certain  circumstances.  These circumstances  include, but are not limited to, a
cumulative  stock  ownership  change of greater  than 50%,  as  defined,  over a
three-year period.  During 1997, the Company experienced stock ownership changes
which could limit the  utilization  of its net  operating  loss and research and
investment tax credit carryforwards in future periods.

9. Segment Information

     In June 1997, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards  No.  131,  "Disclosures  About  Segments of An
Enterprise and Related  Information"  ("SFAS 131"). SFAS 131 revises information
regarding the reporting of operating  segments and was required to be adopted in
periods  beginning  after December 15, 1997. It also  establishes  standards for
related  disclosures  about  products and services,  geographic  areas and major
customers. The Company adopted SFAS 131 for the year ended December 31, 1998 and
the Company's  information  has been  stratified into two Segments - Handwriting
recognition software and Systems integration.

     The  accounting  policies  followed by the  segments  are the same as those
described  in the "Summary of  Significant  Accounting  Policies."  Segment data
includes revenues, as well as allocated  corporate-headquarters costs charged to
each of the operating segments.

     The Company identifies reportable segments by classifying revenues into two
categories   Handwriting   recognition  and  system   integration.   Handwriting
recognition  software  is  an  aggregate  of  three  revenue  categories,   OEM,
Enterprise and Online sales. All Handwriting  recognition  software is developed
around the Company's core technology. System integration represents the sale and
installation  of third party  computer  equipment  and systems  that utilize the
Company's products. All sales above represent sales to external customers.

                                      F-19
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

9. Segment Information (continued)

     The table below presents information about reporting segments for the years
ended December 31:

                                    Handwriting         Systems
                                    Recognition       Integration       Total
                                ----------------- ---------------- ------------
 2002 Revenues                  $      2,214      $      1,058    $       3,272
      Loss from Operations      $     (3,307)     $        (30)   $      (3,337)
      Total assets              $      6,181      $      1,005    $        7186
      Depreciation and
      amortization              $        450      $         17    $         467

 2001 Revenues                  $      4,546      $      1,401    $       5,947
      Loss from Operations      $     (2,842)     $       (104)   $      (2,946)
      Total assets              $      8,662      $      1,410    $      10,072
      Depreciation and
      amortization              $        662      $         25    $         687

 2000 Revenues                  $      5,709      $      1,603    $       7,312
      Loss from Operations      $     (1,594)     $        (13)   $      (1,607)
      Total assets              $      9,896      $      1,405           11,301
      Depreciation and
      amortization              $        310      $         18    $         328

     The following table represents revenues and long-lived asset information by
geographic location for the period ended December 31:

                          Revenues                         Long Lived Assets
                  -------------------------------- ----------------------------
                    2002         2001       2000      2002      2001       2000
                  --------     --------    ------- --------   -------    -------

     U.S.           $ 2,018    $ 4,223   $ 5,401   $  5,555  $  6,113   $  6,430

     China            1,254      1,724     1,911         37        44         66

                 ----------   --------- ---------- ---------- --------- --------
        Total       $ 3,272    $ 5,947   $ 7,312   $  5,592  $  6,157   $  6,496
                 ==========   ========= ========== ========== ========= ========

     The Company's export sales from U.S.  operations were 12%, 16%, and 36%, of
total revenues in 2002, 2001, and 2000, respectively.

10. Statement of Cash Flows Data

                                                        December 31,
                                            ------------------------------------
                                                 2002        2001         2000
Schedule of non-cash transactions:

  Non-cash compensation.....................  $      -    $     46     $     89

  Equity securities issued for services.....  $      -    $     58     $      -
  Intellectual property acquired in
   exchange for 4,700 shares of the
   Company's common stock...................  $      -    $      -     $  5,728
  Fair market value of warrants in
   connection with long-term debt -
   related party............................  $      -    $      -     $      -

                                      F-20
<PAGE>
                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

10. Statement of Cash Flows Data (continued)

Supplemental disclosure of cash flow information:

     Interest  paid  in  2002,   2001,  and  2000  was  $212,  $196,  and  $187,
respectively.

11. Employee Benefit Plans

     The  Company  sponsors a 401(k)  defined  contribution  plan  covering  all
employees meeting certain  eligibility  requirements.  Contributions made by the
Company are determined annually by the Board of Directors.  To date, the Company
has made no contributions to this plan.

12. Quarterly information (Unaudited)

     The summarized  quarterly financial data presented below, in the opinion of
Management,  reflects all adjustments which are of a normal and recurring nature
necessary to present fairly the results of operations for the periods presented.

                              First    Second       Third     Fourth
                             Quarter   Quarter     Quarter    Quarter    Total
                             -------   -------     -------    -------   -------

2002 Unaudited
   Net Sales                 $ 1,157    $1,111     $  525    $    479   $ 3,272
   Gross profit              $   716    $  808     $  321    $    270   $ 2,115
   Income (loss) before
   income taxes, and
   minority interest         $(688)     $(670)     $(1,068)  $ (1,133) $(3,559)

   Net income (loss)         $(688)     $(671)     $(1,070)  $ (1,132) $(3,561)

   Basic and diluted
   income (loss) per share
                             $(0.01)    $(0.01)    $(0.01)   $  (0.01)  $(0.04)

2001 Unaudited
   Net Sales                 $ 1,618    $1,903     $  915    $  1,511   $ 5,947
   Gross profit              $   996    $1,201     $  459    $  1,051   $ 3,707

   Income (loss) before
   income taxes, and
   minority interest         $(741)     $(691)    $(1,228)   $   (552) $(3,212)

   Net income (loss)         $(741)     $(693)    $(1,229)   $   (552) $(3,215)

   Basic and diluted
   income (loss) per share  $(0.01)    $(0.01)     $(0.01)      $(0.01) $(0.04)

                                      F-21
<PAGE>

                     Communication Intelligence Corporation
                   Notes to Consolidated Financial Statements
                                 (In thousands)

12. Quarterly information (Unaudited) (continued)


                             First     Second       Third     Fourth
                            Quarter    Quarter     Quarter    Quarter    Total
                            -------    -------     -------    -------   -------

2000 Unaudited
   Net Sales                $ 1,377      $1,250     $2,346     $2,339   $ 7,312
   Gross profit             $   648      $  442     $1,649     $1,677   $ 4,416
   Income (loss) before
   income taxes, and
   minority interest        $  (889)    $(1,127)    $  107     $  112   $(1,797)

   Net income (loss)        $  (888)    $(1,127)    $  106     $  110   $(1,799)

   Basic and diluted
   income (loss) per share  $ (0.01)  $   (0.01) $   (0.00) $   (0.00)  $ (0.02)


13. Subsequent events

     Registration  Statement.  The Company's  Registration  Statement on Form S1
filed with the  Securities  and Exchange  Commission in connection  with the $15
million  equity  line of  credit  agreement,  subject  to the  number  of shares
available and the market price of the such stock, with Cornell Capital Partners,
LP was declared effective on February 13, 2003. The Company has approximately 24
million shares available for sale under this line of credit agreement.

     Listing of the Company's  Common Stock. As of March 14, 2003, the Company's
common  stock has been  listed on the NASDAQ  Over the  Counter  Bulletin  Board
("OTC") under the trading symbol CICI. Prior to that it was listed on the Nasdaq
SmallCap Market under the same symbol.  The Company's stock was removed from the
Nasdaq SmallCap Market due to noncompliance  with the NASDAQ  continued  listing
requirements  of a minimum  bid price of $1.00 and total stockholder's  equity
requirements of $5 million.

     Equity  line of Credit.  On February  20,  2003,  the  Company  borrowed $1
million dollars less a 6.5% financing fee from Cornell Capital Partners, LP. The
loan will be paid back over a ten-week  period  through draws on the equity line
of credit on a prorata basis.

                                      F-22
<PAGE>

                                   SCHEDULE II

                     Communication Intelligence Corporation
                 Valuation and Qualifying Accounts and Reserves
                                 (In thousands)

Years Ended December 31, 2000, 2001, 2002

                                     Balance     Charged to             Balance
                                  At Beginning   Costs and              At End
                                  Of Period     Expense    Deductions  Of Period
                                  ------------  ---------- ----------  ---------

Year ended December 31, 2000:
Accounts receivable reserves......      $13       $108       $  (3)       $118




Year ended December 31, 2001:
Accounts receivable reserves......     $118       $160       $   -        $278




Year ended December 31, 2002:
Accounts receivable reserves.......    $278       $129       $(164)       $243




                                      S-1